If you use a credit card, you should remember that spending more than the ideal credit limit is not recommended. It not only throws your financial plan into disarray but can also adversely impact your credit score.
The ideal credit utilisation ratio is 30 percent. If your credit limit is ₹7 lakh, then as per the ideal credit utilisation ratio (CUR), you should not spend more than ₹2.10 lakh (30 percent of ₹7 lakh).
What is a credit utilisation ratio?
For those who are not aware, credit utilisation ratio is the percentage of your available credit that you are currently using. It is a significant factor in determining your credit score and shows how much of your credit limit has been utilised on your credit cards.
It can be calculated by using the following formula:
(Credit card balance/ credit card limit X 100).
Let us understand with an illustration. Someone has a total credit card balance of ₹5 lakh and the total credit limit is ₹10 lakh. This means the CUR is 5/10 X 100 equals 50 percent.
A low credit utilisation ratio (under 30 percent) is typically considered good for your credit score. A low CUR means that you happen to manage credit responsibly and are not overly reliant on borrowing.
This indicates to lenders that you are less risky, which boosts your credit score.
However, if you are struggling to maintain an ideal credit utilisation ratio, you should follow these tips.
Four tips to manage credit utilisation
1. Timely payment: You need to pay off your balances before the statement closing date in order to reduce the reported balance.
2. Raising credit limit: You can request to your bank to raise the credit limit. A higher limit reduces your utilisation ratio, with an assumption that your spending doesn’t increase.
3. More than one card: If you have more than one card, you can stagger your spending to avoid high utilisation on any single card.
4.Closure of card: Closing a credit card brings down your total available credit, which can increase your ratio.
