Why does your credit utilisation ratio have such a big impact on your CIBIL score?
Credit Information Companies (CICs) like CIBIL and others use multiple parameters to calculate an individual's credit score. One of the important parameters is the credit utilisation ratio. In this article, we will understand what is the credit utilisation ratio, how it impacts yourCIBIL score, and how to improve your credit utilisation ratio.
The credit utilisation ratio measures the amount of credit an individual utilises from the credit limit available to them. For example, an individual has a credit card with a limit of Rs. 1 lakh and has utilised the card for Rs. 20,000. In this case, the individual's credit utilisation ratio is 20%.
Any individual may have multiple credit cards. In that case, the overall credit utilisation ratio, including all credit cards, will be considered.
Let us see how to calculate the overall credit utilisation ratio. Suppose Akash has 3 credit cards with the following details.
Credit card
Credit limit
Limit utilised / Outstanding balance
Credit Card 1
Rs. 1,50,000
Rs. 35,000
Credit Card 2
Rs. 50,000
Rs. 25,000
Credit Card 3
Rs. 2,00,000
Rs. 40,000
Total
Rs. 4,00,000
Rs. 1,00,000
The credit utilisation ratio is calculated as follows:
(Limit utilised / Credit limit) * 100
= (1,00,000 / 4,00,000) * 100
= 0.25 * 100
= 25%
Thus, Akash’s credit utilisation ratio is 25%.
In the above section, we calculated Akash's credit utilisation ratio at 25%. How should you read this ratio to analyse whether it is high, low, or okay? Usually, banks consider a credit utilisation ratio of 30% or lower as good. The general trend is that the lower the credit utilisation ratio, the better, other things being constant.
If your credit utilisation ratio is 30% or lower, it contributes positively towards
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