In this digital world, the rise in transactions through credit cards has lowered the hassle of carrying heavy cash to malls or stores. If you are a credit card user, you must have come across terms like credit utilization ratio and credit limit. These 2 terms are very commonly used and heard of these 2 terms? The big question is, why do these 2 terms matter so much to a credit card holder?
Well, if you have been wondering about it, then we have got an answer for you. Continue reading to know it.
Let’s begin with understanding both the crucial terms.
Credit card limit
Every credit card has a credit limit attached to it. This credit limit is basically the highest amount you are eligible to borrow from your lender for the purchase. The limit generally is fixed by the lender after factoring in specific aspects of your credit profile like your credit score and income.
Credit utilization ratio (CUR)
CUR or credit utilization ratio is the overall amount that you have borrowed or owe your lender against the overall credit card limit.
What role does the credit utilization ratio (CUR) play?
While it might not appear a big deal, your CUR plays a crucial role to frame your financial profile. Preferably, you are supposed to stick with 30 to 40 percent of CUR (credit utilization ratio). Now, you might be thinking why it is necessary as you are already entitled to use the whole credit card limit.
Well, yes, you are entitled to use the entire limit. However, using your whole limit, even if you can repay your outstanding balance without fail, shows you as a credit hungry person. Lenders are not fans if you are a credit hungry person, and it might also affect your future chances of securing loans and credit cards easily.
Besides being frowned upon by the lenders, a high CUR (credit utilization ratio) can even impact your score negatively. The credit utilization ratio (CUR) is one of the major determinants of credit score. So, if you do not keep a continuous check on your score, then you can bid bye to your good credit score.
Calculating your credit utilization ratio (CUR)
You do not require being a math prodigy to compute your credit utilization ratio. It is rather very simple. All you must do is simply divide the outstanding dues on your card by your overall card limit. For example, let’s assume that you have used Rs 60,000 and your overall limit equals Rs 1.50 lakh. Your CUR in this situation is 40 percent.
Now let us assume your outstanding equals Rs 1 lakh. In this situation, your credit utilization ratio will equal 67 percent, which is very high. In such cases, you must work towards reducing your CUR. You can do so by either requesting a credit card limit enhancement from your existing creditor or availing of another credit card.
4 easy ways to maintain a low credit utilization ratio
Whether you have got a high credit utilization ratio or want to get it on the right track, or need just simple tips to maintain a low CUR, here are 4 tricks you can apply:
Budget your expenses
Forming a budget is the initial step toward financial planning. Ensure to check up on your earlier credit card statements to know where exactly you have been spending your money. Once you are aware of where your funds are going, it will be very simple for you to eliminate unnecessary expenses that have been resulting in a heavy credit card bill and hence a high CUR. Additionally, checking your earlier statements will even endow insight into how you have been using up your credit card. If you are using it more than recommended, then maybe it is time you split up between your debit card and credit card.
Form a budget by cutting unnecessary expenditures and splitting the buys between your debit card and credit card. Stick with it, and you will easily keep your CUR within the 30 percent mark.
Request for credit card limit enhancement
You might not have received a credit card when your income was lesser than now or probably when you were a student. Similarly, depending upon your credit profile, your creditor assigns you a credit card limit. And with time, as your income enhances, you become eligible for a higher credit limit. Thus, ensure to get in touch with the creditor to request credit limit enhancement. If you have an excellent repayment track history, then your creditor might grant instant limit enhancement. If not, then the creditor might hesitate at enhancing your credit limit.
Avail another credit card
Availing of another credit card is the best way to enhance your overall credit card limit and keep your overall credit utilization ratio under check. For example, if you’re present credit card’s limit equals Rs 1.50 lakh and you avail of another credit card that provides a credit limit of Rs 1 lakh. Now your overall credit limit would be Rs 2.50 lakh, which means you’re buying power has enhanced to Rs 1 lakh from Rs 60,000, and still, your CUR will remain 40 percent.
Do not close your credit card.
So, suppose you have 2 credit cards, and you just use only one of the cards. Of late, you have wanted to close the unused card. Before you proceed, note that it is a bad idea. Even though you do not use the credit card, it is recommended you keep your credit card with you as the credit card limit will be included in your overall credit card limit and thus give you an enhanced credit card limit. And this will allow you to keep your CUR (credit utilization ratio) within the recommended limit.
Towards the end, it all boils to responsible credit behaviour. Don’t have a credit card? Apply for it online and use thefree CIBIL score calculator to keep a periodic check on your score. In case it reduces, undertake healthy credit behaviour to improve it. Note that may it be a bank lender or NBFC like IIFL, a CIBIL score is one of the important criteria looked upon for approving your loan or credit card.