10 October, 2024 | 15:36 IST
Credit utilisation ratio is one of the most important factors that affect your credit score directly. Your credit score reflects your creditworthiness and credit history.
Now, let’s understand what the credit utilisation ratio is, how it is calculated, and why it is crucial for credit score.
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A credit utilisation ratio is calculated based on the quantum of the available credit that you have used. It plays a crucial role in figuring out your credit score, which is a numerical representation of your creditworthiness. For example, if you have a credit card with a limit of ₹1 lakh and you are using ₹30,000 of that limit, your credit utilisation ratio would be 30%.
Credit utilisation ratio helps lenders determine the risk of extending loans or credit products to you considering how responsible you have been in managing your credit instruments.
To determine your credit utilisation ratio, use the formula — Total Outstanding Balance / Total Credit Limit X 100.
Let’s understand the credit ratio calculation using an example. Let’s say you have two credit cards. The total credit limit on both cards is ₹1 lakh. On one card, you have an outstanding balance of ₹50,000, while the other card has a balance of ₹0. To calculate your credit utilisation ratio, add up the outstanding balances on both cards (₹50,000 + ₹0) and divide this sum by the total credit limit (₹1 lakh). Then multiply the result by 100 to get the percentage, which is 50,000 / 1,00,000 X 100. Based on this, your credit utilisation ratio will be 50%. The credit agencies also take into account the credit utilisation ratio for individual instruments, like credit cards, as well as overall ratio across all products to finalise the credit score.
The credit utilisation ratio is a significant factor in credit score calculation. Here’s why:
Maintaining a healthy credit utilisation ratio can positively impact your credit score. Here are a few ways in which you can manage it effectively:
ALSO READ: What Affects Your Credit Score & How To Build a Healthy Credit Score
Understanding and managing your credit utilisation ratio is crucial for maintaining a healthy credit score. By keeping your credit usage low relative to your available credit limit, you can show responsible credit management and potentially improve your credit score. Use tools available on platforms like Moneycontrol to monitor your credit score and get insights into how your credit utilisation ratio affects your financial health.
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