Credit cards have revolutionised the way people manage their finances, providing a convenient way to borrow money against a line of credit. However, it is important to understand how credit card usage can affect your credit scores and credit utilisation ratio.
In this article, we will discuss the advantages of maintaining multiple credit cards and offer tips on improving your credit utilisation ratio. If you are looking for expert guidance and services to help you manage your credit score, consider exploring the credit score services offered by Shriram Finance.
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What is a Credit Utilisation Ratio?
Your credit utilisation ratio, often referred to simply as credit utilisation, is the percentage of your available credit that you are currently using. It is the reflection of your credit card usage compared to the available spending limit.
For example, if you have a credit card utilisation limit of ₹1 lakh on a credit card and you utilise ₹60,000 in one month, your credit utilisation ratio would be 60%. This is not a good credit utilisation ratio and will be used by lenders and financial institutions to assess your credit managing capabilities.
Importance of Credit Utilisation Ratio
- Credit Score Impact: Your credit utilisation has a significant impact on your credit score, making it a crucial factor in your financial health.
- Responsible Credit Management: Credit utilisation and credit score are directly related and maintaining a low ratio demonstrates responsible handling of credit, which is favoured by lenders.
- Financial Stability: A high credit utilisation ratio may indicate financial instability or excessive spending, which can be a red flag for lenders.
- Access to Financial Opportunities: Your credit utilisation ratio can affect your eligibility for favourable financial offers. A better credit utilisation ratio would mean better loan terms and credit cards.
How Can You Calculate Your Credit Utilisation Ratio?
To calculate your credit utilisation ratio, follow this simple formula:
Credit Utilisation Ratio = (Total Credit Card Balances / Total Credit Card Limits) × 100
For a precise credit utilisation calculator, it is essential to consider all your credit cards and their respective balances and limits. For your high-utilisation credit card, you can use a credit utilisation calculator to calculate credit card utilisation.
How Does Credit Utilisation Work on Credit Cards?
If you have multiple credit cards, each card contributes to your overall credit utilisation ratio. This means that having more than one credit card can give you more available credit, which can help lower your credit utilisation ratio.
For instance, let us say you have an SBI credit card with a spending limit of ₹1 lakh and an IndusInd Bank credit card with a spending limit of ₹50,000. If you spend ₹40,000 from the SBI card and ₹10,000 from the IndusInd Bank card:
Credit Utilisation Ratio on SBI Card = (40,000 / 100,000) x 100 = 40%
Credit Utilisation Ratio on IndusInd Bank Card = (10,000 / 50,000) x 100 = 20%
By splitting your expenses between both credit cards, you can maintain a healthy credit utilisation ratio. You must note that credit utilisation and credit score are related, lesser credit utilization can positively impact your credit score
Credit Utilisation of 0% is Good?
While having a credit utilisation ratio of 0% may seem like a good idea, it is not necessarily the best approach. Lenders and credit bureaus like to see that you can responsibly manage credit, and a credit utilisation ratio of 0% may indicate that you are not using credit at all. This can have a neutral or even slightly negative impact on your credit score. Aim for a credit utilisation ratio between 10% and 30% to show responsible credit usage.
Common Misconceptions Related to Credit Utilisation
Closing Unused Cards Improves Credit Utilisation Ratio: Closing unused credit cards might seem a smart option for your credit behaviour, but it can hurt. When you close a card, you have less overall credit available, which can make you potentially raise your credit utilisation ratio.
No Activity on Credit Cards is Good: People sometimes think not using their credit cards is good for their credit ratio, but it can backfire. If you do not use your cards at all, lenders might see you as inactive or unreliable.
High Credit Limits are Bad: Many think having high credit limits hurts your credit score, but it is a myth. If you use them wisely, higher limits can lower your credit ratio and boost your credit score.
How Does Your Credit Utilisation Ratio Affect Your Credit Score?
Your credit utilisation ratio plays a significant role in determining your credit score. It accounts for up to 30% of your overall score according to the FICO scoring model. A low credit utilisation ratio indicates responsible use of credit and positively affects your credit score. On the other hand, a high utilisation ratio suggests financial strain and can result in a lower credit score.
How Can You Lower Your Credit Utilisation Ratio?
- Pay-Off Balances: Paying off your balances reduces your outstanding debt and lowers your credit utilisation ratio. Aim to pay more than the minimum total amount due each month.
- Open a Balance Transfer Card: Consider transferring high-interest balances to a new card with low or 0% introductory APR offers. This allows you to consolidate debt and reduce interest payments while lowering your overall utilisation ratio.
- Request a Credit Limit Increase: Contact your card issuer and request a higher credit limit ratio. By increasing your available credit, you automatically decrease your utilisation ratio.
- Apply for a New Credit Card: Applying for additional credit cards increases your total credit limit, effectively reducing the overall utilisation ratio. However, be cautious about taking on too much credit.
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Conclusion
Maintaining a low credit utilisation ratio is essential for improving your credit score and accessing better financial opportunities. By understanding how credit utilisation works and utilising multiple credit cards responsibly, you need to ensure a healthy credit utilisation ratio. Remember to pay off balances, consider balance transfer cards, request limit increases, and apply for new cards as needed.
If you are searching for financial solutions to suit your personal or business needs, choose Shriram Finance for high-yielding deposit plans and loans. Take charge of your financial future today with Shriram Finance's credit score services. If you need a business loan, learn more about it and apply here.
