How excessive credit card usage can ruin your credit score

It is vital to have a good credit score in order to sustain long-term financial stability.

Excessive use of credit cards can quietly eat away at your credit rating, even if you always pay your bills promptly. Many cardholders do not know that the ratio of available credit space to space used - that is, the credit utilisation - is an important determinant of credit worthiness. Repeated high utilization can make a lender think that a borrower relies too much on credit, increasing the lenders' perceived risk.

Why credit utilisation is important

Credit usage is the percentage of your overall credit limit that you are utilizing. For example, if your credit limit is ₹1 lakh and your balance is ₹50,000, then your usage rate is 50 per cent. Credit scoring models used in India by companies like CIBIL and Experian give significance to this figure. Experts advocate a credit usage rate lower than 30 per cent. When the percentage exceeds this, especially beyond 50 per cent, credit scores tend to fall even if the cardholder pays bills in good time.

The influence of high credit utilisation on your credit record

High utilisation can have a significant influence on your credit record. High utilisation is interpreted by lenders as a potential indicator of distress, indicating that the individual depends on credit to pay for everyday expenses. It can lead to poorer credit ratings, which make future loan or credit card approval difficult. It can also lead to higher rates being provided on credit offerings and can lower high-end financial product eligibility. In India, a temporary rise in usage can even adversely affect your score if credit card balances are monitored by credit bureaus before you pay your dues.

How to manage your credit utilisation

To avoid this, active management of credit utilisation is required on the part of cardholders. One such method is pre-paying balances - earlier than the statement date - such that the reduced balance is reported to credit bureaus. Another strategy is to dissipate spending across multiple cards, thereby keeping utilisation low on each card. Other borrowers may also consider requesting a credit limit increase, but only if they feel confident that they can manage a higher limit responsibly.

Why a good credit score matters

It is vital to have a good credit score in order to sustain long-term financial stability. A higher score can also translate into lower interest rates on home loans, car loans, and personal loans, and greater access to more credit-worthy products. As credit usage typically accounts for the biggest portion of a credit score - up to 30 per cent in most models - having it well below the risk bar is likely the simplest and most effective way of maintaining your credit health.

Finally, realizing how the use of credit cards and credit scores are linked is essential to any consumer who desires to create a strong financial background or continue to enhance their existing one. Being mindful of utilisation is key to ensuring your credit history is working for your best financial interests, not against it.