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Know your Credit Utilization Ratio

Friday, January 03, 2014 by Rajiv Raj

cb138n38Today, having a credit card is not a question of luxury. It has somewhat seeped into our system and many a time comes handy in buying things, which are necessary, and in future turn necessary. Interestingly, the recent data presented by the Reserve Bank of India provides credence to the increasing perception that the acceptance of credit cards has improved. According to the data release by the Reserve Bank of India, the total number of credit cards in use has gone up by 7.12% in time period between April 2012 and January 2013. While more people embrace credit cards as a preferred means of transaction, there are many problems associated with it. These problems affect your credit score and point to the important fact: using credit cards responsibly.

Most of us by now are aware of the 'safety norms' while using credit cards. The usual rules say do not share your card details with others, use one time password while using it online and place your credit cards in a safe locker. Most of us do adhere to this safety manual. However, we need to keep an eye on an important factor: Credit Utilization Ratio.

To begin with let us understand credit utilization ratio. It simply means how much credit is availed by you as against how much is offered to you. For example, if your card limit is Rs 100,000 and you spend Rs 80,000 on this card, then in that case your credit utilization ratio stands at 80%. Now you may ask what is wrong if I am at 100% credit utilization ratio after all that is something the bank has offered me. But it is not the case that your bank that treats you like a problem. You are an asset for your bank, but credit bureaus look at you with suspicion. A typical credit bureau logic is - more your credit utilization ratio less attractive you are from the point of creditworthiness.

A rule of thumb is credit utilization ratio of 30% is good. If your credit card offers you a limit of Rs 100,000, please ensure that your monthly outstanding does not cross Rs 30,000. There may be a month when you have spent more than that. But if you are consistently much above the 30% limit, you are seen as a credit-hungry individual, who maybe dependent on credit cards to survive. And such a person may not be considered as creditworthy. 

Another important point is credit utilization ratio must be calculated for all credit lines offered. If you have two credit cards you have to maintain the ratio for both cards put together as well.

For example, if you have two credit cards with a limit of Rs 1 lakh each and you end up spending Rs 90,000 on first card and Rs 10,000 on second card, this means that your average credit utilization is 50%. However, on one card you are at 90% utilization ratio and hence your credit report gets affected and CIBIL score goes down.

To bring credit utilization ratio at healthy level, here are some healthy tips. There are payments which you can make in cash or through net banking, which also bring down your credit card utilization ratio. Keep in check your expenses and cut down on some of the unnecessary expenditure. If you cannot, ask the bank to increase the limits. There are many cases in which the credit limits stay at a level for years, however the individuals availing those credit limit however advance in life with more income and better lifestyle. It is a good idea to ask for an increase in credit limit. Also if you are one of those who do not spend across credit cards- like the one mentioned above, it is better to spend equally on both the cards. For example, had the cardholder spent Rs 50,000 on both credit cards, the average and individual card's credit utilization ratio would have stood at 50%, much better than 90%. Such simple techniques can help you improve your CIBIL score. Hence, it is important that you be a prudent credit card user. This will take care of your credit utilization ratio. Because ultimately it is all about your Cibil credit score, which is also a reflection of your personality.

MadanRajiv Raj

Rajiv is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India’s first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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