How does credit utilisation silently impact your score?

Summary

Banks want to see how much you depend on credit on a regular basis. When your credit utilisation is high, it gives them an indication that you rely heavily on the borrowed money

It is recommended to keep your credit utilisation under 30%

Your credit score depends not only on your repayment history but also on the proportion of credit you regularly utilise. This is known as credit utilisation. Ideally, this ratio should be lower than 30% to maintain a healthy credit score.

Suppose your credit limit is ₹10 lakh and your total credit card bill is ₹4,00,000, which means your utilisation is 40%. Although using 40% of your overall limit seems harmless on the face of it, it has more significance than you believe.

Banks do not only want you to repay your loans, but they also want to see how much you depend on credit regularly. When your credit utilisation is high, it indicates that you rely heavily on borrowed money. Even if you pay your loans well on time, your high credit usage makes you look risky to lenders.

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What people get wrong?

Generally, credit card users have a misconception that they can use their entire credit limit without having any adverse impact on credit score. Although there is nothing wrong in using most of your credit limit, it is recommended that you refrain from maxing out your card. It leads to a sharp fall in your credit score.

What is the ideal credit utilisation?

Typically, you should keep your credit utilisation under 30%. If you push it upto 50-60%, it becomes noticeable to lenders. But if you further push it beyond 80-90%, your credit score could drop substantially.

What should you do?

Although utilising over 30% of credit is not recommended but it does not mean to keep your utilisation nil. Lenders want to see responsible credit behaviour that can be gauged through borrowing and regular repayment.

Before applying for a loan, what does your credit score tell lenders?

And when your credit requirement is often more than 30% of your overall limit, you can ask your bank to raise your credit limit. Alternatively, you can apply for another credit card so that you can split over usage across the two cards.

Disclaimer: MintMoney has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit

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