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What Is Credit Utilization Ratio and Why Is It Important?

Adhil Shetty
Image: katemangostar/Freepik

Q: What is credit utilization ratio and why is it important? – Arunabha

A: Credit Utilization Ratio (CUR) is the calculation (in percentage) of your total outstanding credit balance against the total credit limit across all your revolving accounts (read credit cards). Meaning, suppose you’ve only one credit card with Rs. 1 lakh credit limit on it and your current outstanding balance is Rs. 50,000. In this case, your CUR is (Rs. 50,000/Rs. 1 lakh x 100) 50%.

Similarly, if you’ve two cards with Rs 1 lakh credit limit each and your current outstanding amount stands at Rs. 50,000 for the first card and Rs 5,000 for the second card, your CUR stands at (Rs. 55,000/Rs. 2 lakh x 100) 27.5%.

You’ll be well-advised to ensure your CUR doesn’t exceed 30%. A high credit utilization ratio shows you’re over-reliant on credit and has a negative impact while assessing your creditworthiness. It will, thus, bring down your credit score, which in turn will either discourage lenders from extending new loans at favourable repayment terms (like with a lower interest rate) or will disqualify your applications entirely.

So, what to do if you have a high CUR? Here are a few simple tips:

  • Keep all your credit card expenses in check and avoid new wasteful spends
  • Never miss a card payment deadline and always pay the full amount due (and not the minimum amount due)
  • Request your card provider to increase the credit limit on your card. They might consider your request if you have a decent-to-good credit score and a longstanding relationship with the bank
  • Apply for another credit card, spread out your expenses, ensure you pay both the bills in full on time every month and never go overboard with your card spends
  • Credit limit is not an extension of your income. Don’t get anywhere close to maxing out your card(s)

Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil.