Credit Utilisation Ratio: How It Works

Credit has become an essential tool for managing expenses and achieving financial goals. Credit cards offer the flexibility to make necessary purchases and pay for them later. However, responsible repayment is essential to maintaining financial health. Many borrowers opt to pay only the minimum due, which can lead to higher debt and impact their credit score. This article explores the concept of the credit utilisation ratio and its impact on your CIBIL score, helping you make informed financial decisions. 

What is a Credit Utilisation Ratio?

Your credit utilisation ratio is the percentage of your available credit that you have used. Depending on the scoring model, this ratio can contribute to 20% to 30% of your overall credit score.

If you have a credit card but do not use it, your credit utilisation ratio remains at zero. However, as soon as you start making purchases, your ratio adjusts accordingly. To maintain a healthy credit score, it is important to keep your credit utilisation low—ideally below 30% of your total credit limit.

An occasional increase in your credit utilisation would not harm your CIBIL score, but if you consistently exhaust your credit cards or keep a high utilisation ratio, your score is likely to drop. Managing your credit usage wisely can help you maintain a strong financial profile and improve your borrowing potential. 

How to Calculate Credit Utilisation Ratio?

It is quite easy to calculate your credit utilisation ratio. Simply divide the balance available on your credit card by the total limit on your credit card and you will have your credit utilisation ratio. 

Therefore, credit utilisation ratio = (Total outstanding on all credit cards/ Total credit limit) x 100 
Let us understand this with an example. If you have two credit cards with a total limit of Rs.1 Lakh with an outstanding balance of Rs.20,000 on one card and Rs.30,000 on another card.  

This way, your credit utilisation ratio is calculated as: 

The total outstanding balances on both the cards: Rs.20,000 + Rs.30,000 = Rs.50,000 

The total credit limit = Rs.1 Lakh 

The credit utilisation ratio on your card is: (50,000/1,00,000) x 100 = 50% 

This means your credit utilisation ratio is 50%.  

Key Factors that Shape Your Credit Utilisation Ratio

Your credit utilisation ratio reflects how much of your available credit you are currently using, and it plays a major role in determining your credit score. It is calculated by dividing the total outstanding balances on your credit cards by the total credit limits, expressed as a percentage. Lenders often prefer to see this ratio below 30%, as consistently high utilisation can negatively impact your score.  
Several factors influence this ratio: your spending habits, the size of your credit limit, how often you clear outstanding balances, and whether you keep unused credit cards open. To maintain a healthy ratio, you can lower spending, request a credit limit increase, track expenses across multiple cards, pay off balances promptly, and avoid closing old cards unnecessarily. Keeping utilisation under control demonstrates responsible credit behaviour and helps improve access to future loans. 

What is a Good Credit Utilisation Ratio? 

A good credit utilisation ratio is typically 30% or lower of your total available credit. This means you should aim to use no more than 30% of your credit card limit at any given time. Lenders consider this an ideal ratio as it indicates responsible credit management. 

How Credit Utilisation Impact Borrowers?

Your credit utilisation ratio plays a key role in determining your creditworthiness. It reflects how much of your available credit is being used and impacts your CIBIL score directly. Lenders assess this ratio to gauge your financial management before approving a loan. 

How Does Credit Utilisation Affect Your Credit Score?

Credit utilisation is one of the most important factors in your credit score. It represents the percentage of your available revolving credit that you are currently using. A high utilisation ratio suggests you may be relying too heavily on credit, which can lower your score. Conversely, keeping your utilisation low shows responsible credit management and helps improve your score.  

How to Lower Your Credit Utilisation Ratio?

To reduce your credit utilisation ratio: 

• Pay outstanding balances regularly and on time. 
• Avoid closing old credit cards, as this reduces your total available credit. 
• Aim to keep overall utilisation below 30%. 

Common Credit Utilisation Mistakes to Avoid

To keep your credit utilisation low, avoid the following mistakes: 

• Do not max out a single credit card while keeping other cards unused, as it can hurt your credit profile. Credit bureaus evaluate utilisation per card, not just overall, so high usage on one card can raise concerns.  
• Don’t assume that paying the bill before the due date keeps utilisation low is a common misunderstanding. What gets reported is usually the balance on the statement date, not the payment date. 
• Closing old credit cards without careful thought can reduce your total available credit. This increases your utilisation ratio instantly, even if your spending remains unchanged. 

Simple Tips to Help You Improve Your Credit Utilisation Ratio

Clear Credit Card Bills on Time

To maintain a healthy credit utilisation ratio, it is essential to clear your credit card bills on time. Credit cards offer the convenience of purchasing now and paying later, but responsible usage is key. Regardless of how often you use your credit card, timely repayment is important. Always aim to pay the full outstanding balance rather than just the minimum due, and avoid maxing out your credit limit. By using your credit card wisely and making timely payments, you can keep your credit utilisation in check and maintain a strong credit score.

Request Your Lender to Increase the Credit Limit on Your Credit Card

If you have a strong repayment history, you may request an increase in your credit limit. A higher credit limit can help lower your credit utilisation ratio, positively impacting your CIBIL score. However, it is essential to approach this wisely - only request a credit limit increase if you can manage it responsibly. 

Consider Using Different Cards for Differet Purposes

Yet another way you can increase your credit utilisation ratio is by using different credit cards for different transactions. This will help you maintain a low credit utilisation ratio on all your credit cards. 

Also Read: Ways to Improve Your Credit Score with a Credit Card

Final Words

If you are planning to apply for a loan—whether secured or unsecured—your eligibility will largely depend on your CIBIL score. Most lenders require a minimum score of 750 for loan approval. Your CIBIL score is influenced by several factors, including your credit history, credit utilisation ratio, and new credit enquiries. By keeping your utilisation low and making timely repayments, you can improve your credit profile and increase your chances of securing a loan.

Also Read: Tips to Maintain Your Business CIBIL Score Above 700