What Is a Credit Utilisation Ratio?

Your credit score is an essential factor that impacts your financial health, influencing everything from loan approvals to interest rates. One critical component of your credit score is the credit utilisation ratio. Understanding what this ratio is, how it’s calculated, and its significance can help you manage your credit more effectively. 

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Understanding Credit Utilisation Ratio

Definition of Credit Utilisation Ratio

The credit utilisation ratio, also known as the credit utilisation rate, is the percentage of your available credit that you are currently using. It is a measure of how much credit you have used compared to the total credit available to you. This ratio is a key indicator for lenders and credit scoring agencies to assess your creditworthiness.

Importance of Credit Utilisation Ratio

The credit utilisation ratio is a significant factor in calculating your credit score, often accounting for about 30% of the score in many credit scoring models, such as FICO and VantageScore. A lower ratio indicates that you are using a small portion of your available credit, which can positively impact your credit score. Conversely, a higher ratio suggests that you are heavily reliant on credit, which can be a red flag for lenders.

Read more: Ways to check your credit score online

Factors Affecting Credit Utilisation Ratio

Changes in Credit Limits

Any changes to your credit limits directly impact your credit utilisation ratio. If a lender increases your credit limit and you maintain the same balance, your ratio will decrease, which can positively affect your credit score. Conversely, if your credit limit is reduced, your ratio will increase if your balance remains unchanged.

Changes in Balances

Paying down your credit card balances reduces your credit utilisation ratio. On the other hand, increasing your balances through new purchases or cash advances will increase your ratio. Regularly monitoring and managing your balances can help you maintain a favourable credit utilisation ratio.

Opening and Closing Accounts

Opening a new credit account can decrease your credit utilisation ratio by increasing your total available credit, assuming you don’t immediately accumulate a large balance on the new account. Conversely, closing a credit account reduces your total available credit, potentially increasing your ratio if you have balances on other accounts.

Read more: Income impacts on your credit score – personal loan

Managing Your Credit Utilisation Ratio

Regular Monitoring

Regularly checking your credit utilisation ratio is crucial for maintaining a healthy credit score. Many credit card issuers and financial apps offer tools to monitor your credit utilisation. Keeping an eye on your ratio allows you to make timely adjustments to your spending and repayment habits.

Strategic Payments

Making strategic payments can help manage your credit utilisation ratio. Consider making multiple payments throughout the billing cycle to keep your balances low. Additionally, paying off high-interest cards first can help reduce your overall debt more effectively.

Credit Limit Increases

Requesting a credit limit increase can be a strategic move to lower your credit utilisation ratio. However, be cautious with this approach, as some lenders may perform a hard inquiry on your credit report, which can temporarily affect your credit score. Ensure you request a limit increase only when necessary and when your credit profile supports it.

Read more: How to maintain a healthy CIBIL score?

FAQs

How often is my credit utilisation ratio updated? 

Your credit utilisation ratio is typically updated when your credit card issuer reports your balance to the credit bureaus, which usually occurs once a month, around your statement closing date.

Does my credit utilisation ratio affect my credit score immediately? 

Changes to your credit utilisation ratio can affect your credit score as soon as they are reported to the credit bureaus. Therefore, timely payments and balance management can have an immediate impact on your score.

Does having a high credit utilisation ratio always mean I’m a risky borrower? 

Not necessarily. A high credit utilisation ratio can indicate higher usage of available credit, but it’s essential to consider it alongside other factors like your payment history, length of credit history, and overall debt levels.

Can I have a high credit utilisation ratio on one card and still maintain a good credit score? 

It’s possible, but it’s generally better to keep your credit utilisation low across all cards. High utilisation on a single card can negatively impact your score, even if your overall utilisation is low.

Does closing a credit card with a zero balance affect my credit utilisation ratio? 

Yes, closing a credit card reduces your total available credit, which can increase your credit utilisation ratio if you have balances on other cards. It’s often better to keep the card open and use it occasionally to maintain the available credit.

Understanding and managing your credit utilisation ratio is fundamental to maintaining a healthy credit profile. By keeping your ratio low, making strategic payments, and monitoring your credit regularly, you can positively influence your credit score and overall financial well-being.