15-Oct-2016 written by : FSI-Team
Credit Score is important for individuals today for reasons that go beyond taking a loan. Credit Rating is an indicator of individual’s creditworthiness, it gives a comprehensive picture of one’s financial health and in a lot of instances can form the basis for an applicant getting a job or not.
There are a various factors that contribute to making of a credit score; credit utilization ratio is one them. One’s credit utilization ratio is the second most important factor (the first being the repayment history) for calculating an individual’s credit score. It’s recommended that once in a while a person does free CIBIL check online to assess the credit health.
Credit Utilization ratio is the proportion of the average spending on a card to the total sanctioned credit limit. This ratio is calculated per card wise and also for all cards put together. Credit utilization is calculated as total open credit card balances vis-à-vis total open credit card limits available.
One may wonder if one is paying their bills on time how does it make difference if the total spending is high in proportion to the sanctioned limit as long as one does not shoot the limit. A high credit utilization ratio indicates credit hungry behavior. It also indicates that in case of loss of a regular income flow the person with a high credit utilization ratio is more likely to default and high credit utilization raises the level of unsecured debt which is also not good for the credit score.
In case you have a high credit utilization ratio and are looking for ways to tackle it here are a few suggestions.
Get a Bigger Limit: Often with passing of time the income levels go up and so does the expenditure. However we may forget to get our credit limit enhanced even though we might be eligible for it. Thus the simplest thing could be to talk to your credit card company and get a bigger limit sanctioned if you are eligible for it.
Apply for a Fresh Card: If you are not eligible for a bigger limit but your credit card spending is high in proportion to the sanctioned limit then you could explore the option of getting a fresh card. Having said that this option must be exercised with care and is not an invitation to increased spending. Get a fresh card issue only if you manage to pay your existing bills on time.
Do Not Surrender Existing Cards: Even if you are not using some cards do not surrender them as they add to your overall available credit limit and thus lower the credit utilization ratio.
Reduce Spending on the Card: Till now we have looked at ways that increase the denominator what if decrease the numerator to reduce the ratio. The numerator in this case being the spending on the card. One could look for ways to reduce the expenditure made on cards. If the reason is not credit but just the convenience for use of of credit cards then one could consider suing debit cards or explore the option of making online payments. However this option may be the most difficult to put into action.
Spread Spending Among Cards: As we discussed earlier the utilization ratio is calculated per card wise as well as overall for all cards. So if you have multiple cards make sure you spread your expenditure across all of them in proportion to the credit limit sanctioned. Thus a card which has a bigger limit should be used more and so on.
While the above can help in improving your credit utilization ratio but the bottom line is to always be restrained in using your credit card and be on time in making payments. The utilization ratio should be kept at less than 30% ideally.