Does a high credit utilisation ratio hurt your credit score?

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Your credit utilisation ratio (CUR) is just the credit used in relation to the available limit on your credit card. If the available limit on your credit card is Rs 1 lakh; you spend Rs 40,000 in a month; your CUR is 40 percent. This statistic is kept under close watch by lenders and credit bureaux. A healthy CUR is below 30 percent. Anything higher shows risk and brings your score tumbling back.

Why a high CUR is a problem

Spending too much of your limit consistently makes you appear credit-hungry to the banks. Even if you repay on time, the lenders may perceive this negatively due to financial strain. Gradually this trend minimises your credit score, which impacts your loan eligibility or higher interest rates at the time of lending.

Simple ways to bring it down

The obvious thing to do is to spend less on your card. But this may not always be feasible. The other thing you can do is to get a higher limit overall so the same spend makes less of a proportion. Say the limit increases from Rs 1 lakh to Rs 1.6 lakh. The same Rs 40,000 spend reduces the CUR from 40 percent to 25 percent. That straight away gets you into the zone of comfort.

How to reach higher limit

Banks also offer credit limit increase (CLE) offers on a regular basis in terms of usage and payment history. They can be accessed through email, SMS, or your bank's app. Upgrading can be requested in case you receive no such promotion through submission of updated proof of income. A pay hike is also commonly seen influencing banks to increase your limit.

What if the bank rejects you?

However, in case your present bank does not provide you with any better limit, you do have alternatives. You may ask for a new credit card issued by some other bank, which increases your overall available credit and space out the bills. You may also look at a secured credit card against a specific FD. This is simpler to obtain and provides 75-100 percent of the FD's worth of credit limit.

Why limit enhancement helps

Besides reducing your CUR, it also transfers increased purchasing power with you, the potential of earning additional reward points, and possibly easier year-to-year fee waivers if you exceed spending levels. It even provides some cushion in emergency situations—though it's always preferable to depend on an emergency fund rather than on a credit card.

The bottom line

Having your credit utilization at 30 percent or less is one of the fastest and easiest ways to protect your credit score. Where it's impossible to cut costs, see where you can raise your credit limit or obtain another card. A lowered CUR keeps your score in top health and minimizes your costs of lending in the long run.