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Blogs > Why is Credit Utilization Ratio Important?
The process of calculating the credit score is different for each credit bureau but generally, the factors remain the same. The most important factor that determines your credit score is your payment history. Any defaults on your EMI and credit card payments can lead to a lower credit score. The second most important factor that is considered while calculating the credit score is Credit Utilization Ratio. Let’s see what makes this ratio so important and how we can keep it in check-
Credit utilization ratio is the ratio of the credit amount you have used on your credit card and the maximum credit limit that you were allotted, as a percentage. So in a way, this ratio demonstrates the amount of credit that you utilize and hence the name, credit utilization ratio.
An ideal credit utilization ratio would be 0. But since non-usage of a credit card does not good to your credit score, you need to use your credit card from time to time and that means a 0 credit utilization ratio is not possible. Hence it is advisable to aim and maintain the credit utilization ratio as low as possible. A good credit utilization ratio is anywhere below 30%. If you are using less than 30% of your credit limit, you will be considered a responsible borrower by potential lenders.
Related Article: Understanding Credit Report: Everything You Need To Know
Lowering and maintaining your credit utilization ratio is no rocket science. You just have to take a good look at your existing credit utilization strategies and, take some necessary changes accordingly. Here are a few steps that can help you in doing so-
This one is fairly logical. If you want your ratio to reduce, increase the denominator of the fraction. When you increase your credit limit, your credit utilization ratio will reduce automatically. Contact your credit card provider to get information on any updates or upgrades available on your credit card. Request them to increase your credit limit. If you have recently received a salary hike etc then you can use that to get a higher credit limit.
Getting multiple credit cards helps you in many ways but goes with a big disclaimer that you have to be very careful with them. Do not indulge in overspending just because you can. If you do decide to get multiple credit cards, spread out your expenses through them so that you can reduce your credit utilization ratio. Make sure you pay the dues of all the credit cards on time to maintain a good credit score. Bonus: you can sync the billings cycles in a way to make the maximum benefit out of the grace periods of the credit cards.
Again, this is basic maths. If you want to reduce a ratio, reduce the numerator. If you can, reduce the amount of money you use on your credit card. Try managing your expenses from your salary and use your credit card only when you really need to or just to keep it in use. At least for some time, until your ratio improves and eventually, your credit score.
So now that you know why this ratio is an important factor in the calculation of your credit score, make sure you maintain it diligently. To check your credit score for free, you can log on to the IndiaLends website or download the IndiaLends app.
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