Nov 07, 2016 11:04 AM IST | Source:

Use multiple credit cards to reduce credit utilization ratio

Keeping your credit utilization ratio low is a smart thing to do, as most financial institutions and lenders use this as a parameter to assess a person‘s credit-managing abilities.

Adhil Shetty

Credit cards is one of the better means to make payments. Not only they offer convenience but they also offer to keep the track record in addition to the availability of credit on tap. However, that makes one responsible for prudent use of credit card. Credit utilization ratio is a parameter that you can watch out for while keeping a tab on your credit card use.

Credit utilisation ratio (CUR) is the outstanding credit balance compared with the total credit limit across all credit cards, expressed in percentage. For example, if your credit card limit is Rs. 1 lakh, and you have used up Rs. 70,000 in a month, your CUR is 70%. Keeping your credit utilization ratio low is a smart thing to do, as most financial institutions and lenders use this as a parameter to assess a person’s credit-managing abilities.

Why a high CUR is not good

Running up your credit card will only fetch you low CIBIL scores even if you pay your bills entirely every month, as a high CUR makes you look credit hungry and constantly in financial crunch. When the CUR is regularly high, lenders assume that there is a high probability of the card user defaulting on his payments, thus impacting the borrower’s credit score negatively. This might make things hard for you when you are trying to get a loan. Therefore, we suggest you keep your credit spending to not more than 30% either by using multiple cards or by paying off the amount as soon as it reaches the target. Overuse of a credit card, especially maxing out on a regular basis, is a no-no.

How can using multiple credit cards be a good thing?

While we think it’s a good practice to spend through cash or debit cards, if you are into credit cards, we suggest you to split your expenditure between multiple cards. The idea is to reduce your credit utilization ratio for each card. The CUR is calculated separately and collectively on each credit card allotted to you.
For example, if you have two credit cards with Rs. 100,000 as spending limit on each of them, on spending Rs.50,000 using both cards, your total CUR would be 25%. If you were to spend the whole amount from one card, your CUR would be 50% on one card and 0% on the other.

Balancing CUR using multiple cards

In the table mentioned below, a card user has two cards with a credit limit of Rs 1 lakh on each. He uses Card I excessively but underutilizes Card II. The average CUR is close to 49% on Card I and only 9% on Card II.

If the card user shifts some load from Card I to Card II, he can easily keep his CUR at a comfortable 25-30% level on a regular basis.

Other than splitting your expenses, it’s important to use the cards judiciously in order to maintain a healthy CUR. Identify your monthly spending pattern and plan your expenditure to minimize your CUR or use of credit cards for that matter. If you end up spending more than 25% to 30% of your credit limit, talk to your card company to increase your limit, in order to bring down your CUR.

For example, if you are spending Rs. 40,000 on a credit limit of Rs. 1 lakh, leading to a CUR of 40%, you should talk to your card company to raise your limit to Rs. 1.5 lakh, in order to reduce your CUR to 26%.

In case of cash crunch, instead of reaching out for your credit card, we suggest you use other borrowing instruments such as personal loans or secured loans as credit card debts are relatively more burdening.

Try and use the cards wisely to increase your purchasing power. Compare the cash back offers and rewards you can avail for specific products and pick the right card for the right purchase to optimize your shopping experience.

In case of closure of one of the credit card accounts, make sure you increase your spending limits on the remaining cards in order to maintain a healthy CUR and you can always go back to the previous spending limit if you take another card in future.

Handling multiple credit cards can be tricky but they can help you get a good credit score if used smartly. The key is to reduce your credit card expenses, split the usage in right proportion and maximize your purchasing power.
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