Tips for Maintaining a Healthy Credit Utilization Ratio

A credit utilisation ratio is the percentage of a borrower's total revolving credit that is used relative to the available credit limit. A healthy credit utilisation ratio indicates how responsibly an individual has managed the borrowed funds. It builds lenders' confidence in borrowers, thereby increasing the chances of loan approval, better interest rates, and better loan terms.

Maintaining a lower credit utilization ratio also directly influences the credit score. Hence, let's explore different strategies to maintain a healthy credit utilisation ratio.

Why is a Low Credit Utilization Ratio Significant?

Credit bureaus view a higher credit utilisation ratio as a sign of financial stress. Spending up to the total credit limit indicates a lack of financial discipline and money management. This, in turn, affects how lenders assess an individual’s creditworthiness.

On the other hand, a lower utilisation reflects controlled spending of the credit amount and the individual's timely repayment behaviour. When the borrowed funds are obtained through efficient planning and management, they are consumed optimally.

Most experts recommend that borrowers keep the utilisation ratio below 30%. CIBIL also recognises that maintaining a lower utilisation ratio contributes to a stronger credit profile. Below are some of the best practices every borrower should follow to maintain good credit health:

Maintain Low Credit Card Balances

Maintaining a healthy credit utilization ratio requires keeping credit card balances low. High outstanding balances may weaken credit scores and raise utilisation, even when bills are paid on time. Borrowers should pay down outstanding card balances whenever possible, especially prior to the bill date. This helps to control credit utilisation. Reduced balances indicate responsible credit use, lower interest expenses, and increased lender confidence.

Request for an Increase in Credit Card Limit

In some cases, if the spending amount cannot be reduced and relies heavily on credit, it is better to raise the credit limit. One can request a credit limit increase that instantly reduces the utilisation ratio. However, this must not be used to justify higher spending. Apart from helping to reduce the utilisation ratio, a higher credit limit can provide support during emergencies when funds are needed.

Distribute Credit Usage Across Multiple Cards

Lenders not only view the total usage of the credit limit across multiple credit cards, but also look at individual cards. Try to avoid spending the maximum amount on a single card. Spreading the spend across multiple cards is essential because it results in lower utilisation per credit account. Also, it indicates better fund management and balanced credit usage, which improves the overall credit image.

Maintain a Good Payment History

Credit bureaus typically record outstanding credit card balances as reported by lenders at a specific point in the billing cycle. Making payments early, before the statement date, can help lower the reported credit utilisation ratio. Even if the full outstanding amount is not repaid, partial early payments can still reduce utilisation and support better credit scores.

Early payment demonstrates a borrower's proactive financial management. Over time, it contributes to better payment history and builds creditworthiness. It also reduces the interest accumulation. Hence, always try to make credit card payments before the end of the billing cycle.

Keep Old Credit Card Accounts Active

Many individuals make the common mistake of closing old credit card accounts. It is an opportunity missed to showcase the credit age and consistent repayment behaviour. Closing older cards also reduces total available credit, which can greatly increase the credit utilisation ratio.

It is advisable to keep older credit cards active by using them infrequently, as they boost the credit profile by indicating credit longevity.

Monitor CIBIL Score Report Periodically

It is a good financial habit to check the credit reports for any incorrect balances or limits. Incorrect or missed updates to credit status from a financial institution can inflate the utilisation ratio. Immediate spotting and correction of errors will protect the CIBIL score.

One can get access to a free credit report from authorised bureaus annually. When you encounter any error, raise a dispute to both the lender and the credit bureau without delay.

Make Use of a Loan Account to Consolidate Debt

A high-interest card debt can increase utilisation and repayment stress. A strategy to consolidate existing debts through a Personal Loan can help convert them to fixed EMIs. This results in a reduction of the revolving credit exposure. Structured EMI repayments support better financial discipline and can significantly improve the credit utilisation ratio over time.

Maintain an Emergency Fund

One important factor that can lead to an increase in credit utilisation is financial emergencies. Maintaining a separate emergency fund in addition to regular credit usage is important to preventing unexpected surges in credit card balances. Strong financial discipline, control over credit utilisation, long-term credit health, and general financial stability are all enhanced by emergency readiness.

Understand Lender-Specific Evaluation Method

Credit usage is assessed differently by each lender. While some emphasise the use of each card, others concentrate on the total exposure to revolving credit. You can proactively manage credit and prevent unexpected spikes in utilisation by being aware of these evaluation techniques. In addition to meeting lender requirements, maintaining low utilisation across all your cards improves your borrowing profile with several financial institutions.

Also Read: Essential Credit Score Monitoring Tips for Better Financial Health

Maintain Consistency in the Credit Management

It can be unwise to expect immediate results, as improving the credit utilisation ratio is a long-term process. Short-term gains could be beneficial; however, the most important thing is consistent good credit behaviour.

Credit ratings increase over time when stable habits are established, such as on-time payments and controlled spending. Making credit usage a habit and being aware of it at all times can greatly improve your overall financial well-being.

To Conclude

A good credit utilisation ratio reflects a disciplined financial behaviour. Keep credit balances low, make early repayments, keep old accounts open, build an emergency fund, and monitor your credit report regularly. All these strategies will help maintain a good credit utilization ratio and strengthen your borrowing power. Also, strategic credit management creates long-term financial confidence.

Take charge of your credit health today. Check your CIBIL score instantly with Poonawalla Fincorp and stay on top of your financial profile.

FAQs

Does zero credit utilization improve my credit score?

No. Zero credit utilisation reflects inactivity and no responsible repayment.

Can a high utilisation ratio affect loan interest rates?

Yes. A high utilisation ratio indicates financial stress for an individual and increased lender risk. Hence, it can lead to higher loan interest rates.

Will the utilisation ratio change daily?

Yes. Depending on the spending and credit repayment, it often fluctuates.

Can EMI purchases increase credit utilization?

Yes. Outstanding EMI amounts are also considered used credit, increasing the utilisation ratio.

Does credit utilisation matter even if I never miss a payment?

Yes. Although the repayment behaviour helps enhance the credit score, higher credit balances signal more credit dependency.