Your credit score is a representation of your financial well-being and is more than just a numerical value. Your credit utilisation ratio is one of the many variables that affect it, and it is surprisingly important. Don’t worry, however; it’s not as difficult as it seems. We’ll explain what it is, why it matters, and how to lower it to raise your score in this guide.
What Is Credit Utilisation Ratio?
Consider your credit utilisation ratio as a reflection of how much of your available credit you are currently using. To determine the percentage, divide your total credit card balance by your total credit limit, then multiply the result by 100.
Your utilisation ratio is 30%, for instance, if your credit card limit is ₹50,000 and your current balance is ₹15,000. For optimal credit health, most experts recommend keeping this ratio below 30%.
By adding up your card balances and dividing them by your total limits, you can quickly determine your credit utilisation ratio yourself or with online credit tools.
Why Credit Utilisation Ratio Matters
Your credit score reflects not only how you use credit, but also whether you pay your bills on time. Lenders would like to see that you can use your resources wisely and avoid using all of your cards at once.
Your chances of getting a loan, mortgage, or better interest rate may increase if your ratio is lower because it tells lenders that you aren’t overly dependent on credit. On the other hand, even if you pay on time, a high ratio can lower your score.
It is crucial to keep a close eye on your credit utilisation ratio because research indicates that it is one of the most important factors of your credit score.
Practical Ways To Lower Your Credit Utilisation
Lowering your credit utilisation ratio is not a financial miracle; it depends on smart habits and strategic moves. Some of the practical tips are,
Pay down balances quickly.
One of the easiest steps is to pay off all the balances as soon as possible. Even a small unpaid bill throughout the months can lower your ratio reported to credit bureaus.
Increase your credit limits.
Requesting a higher credit limit from the bank or from your credit card issuer can automatically lower your credit utilisation ratio, as long as your spending does not increase proportionally.
Spread out your spending.
If you have multiple cards, use each one wisely instead of piling all your charges into a single card. This will help in keeping each card’s utilisation low.
Make multiple payments per month.
Instead of paying the total amount towards the end of the month, consider paying off balances multiple times a month. This keeps reported balances lower and reduces your ratio.
Keep old cards open
Even if you don’t use an old credit card often, keeping it open contributes to your total available credit, which can improve your utilisation ratio.
Avoid closing accounts
Closing a card can reduce your total available credit, in turn raising your utilisation ratio if you still carry balances on other cards.
By following the above-discussed strategies, you can lower your credit utilisation ratio effectively and see improvements in your credit score over time.
Mistakes To Avoid
Avoid common mistakes when working on your credit usage:
- Paying Out Cards – High balances submitted to credit bureaus can lower your score, even if you pay them off later.
- Ignoring Small Balances – Don’t dismiss smaller balances because each card adds to your total usage.
- Depending Only on Credit Limit Increases – If you keep spending more, increasing your credit limit will not help.
Being aware of these errors ensures that your attempts to reduce your ratio will be successful.
Monitoring Your Progress
It is essential to check your credit report regularly. You can view your credit utilisation ratio and overall score for free from several banks and financial apps. Tracking it enables you to keep track of progress and identify any mistakes that might damage your credit.
One easy method to keep up good credit practices is to check your ratio on a quarterly or monthly basis.
The Bigger Picture: Healthy Credit Habits
Reducing your credit utilisation ratio is only one part of the answer. Your credit score can be significantly improved by combining it with:
- On-time Payments: To prevent charges and late fees, pay all of your bills on time.
- Multiple Credit: Having a variety of credit products, such as mortgages, loans, and credit cards, can raise your credit score.
- Minimal New Credit Applications: Apply for new credit because each hard inquiry may lower your score a little.
You can build a strong foundation for financial health by developing these habits and controlling your usage.
Conclusion
The good news is that managing your credit utilisation ratio doesn’t require sudden changes; rather, it is about small, consistent actions that show lenders you’re responsible with credit. Whether it’s paying down balances, spreading out spending, or keeping old cards open, each step counts toward improving your score.
By understanding your ratio and taking necessary steps, you’re not just boosting a number; you’re building a healthier financial future. With patience, discipline, and smart strategies, a better credit score is within your reach.
