credit utilization

How Credit Utilisation Affects Your Credit Score?

December 29, 2023 • 730 views

Credit utilisation is one of the major factors that influences your credit score. It is an indicator of the lending risk, and lenders assess this ratio to comprehend how well you can manage your revolving credit. One of the most effective ways to manage credit utilisation and credit score is by repaying your existing debts on time. In this blog, we discuss what credit utilisation is, how it is related to credit score, and the various ways you can improve the credit utilisation ratio. 

What is Credit Utilisation?

Credit utilisation refers to the percentage of the revolving credit you have used from the total credit available. It is calculated by dividing the credit amount you have utilised with the total available credit. Lenders assess your credit utilisation ratio to analyse how efficiently you manage your current debt liabilities.

It is advised to maintain the credit utilisation under 30%. A high credit utilisation ratio increases the chance of loan application rejection. On the other hand, a lower credit utilisation ratio allows you to get the loan approved without any hassles and get the credit with favourable terms. 

What is the Relationship Between Credit Utilisation and Credit Scores?

A major correlation exists between your credit card utilisation rate and credit score. The more credit you are utilise, the more amount you must repay. If you default on the repayment, it will reflect in your credit report and negatively impact your credit score.

High credit utilisation can make it difficult to meet your current financial obligations. In such cases, lenders may need clarification regarding your repayment potential and become less likely to extend new credit, or they may provide the loan at a higher interest rate to mitigate the risk.

Also Read :- What Is Loan Settlement? How Does It Affect Your Credit Score?

What are the Strategies to Improve Credit Utilisation?

Mentioned below are some of the effective strategies to improve the credit utilisation ratio: 

  • Increase the Credit Limit

If you want to limit your credit utilisation, you can request the credit card issuer or the lender to increase the credit limit. If you have a good history of on-time payments, you can easily get approval for increasing the credit limit. It is important to note that the credit card issuer can conduct a hard inquiry before accepting the request for the new credit limit. 

  • Distribute the Spends Across Different Cards

Instead of using a single card to pay for all your expenses, you can use more than one card. This way you can utilise the limit of different cards and yet keep the credit utilisation ratio below 30%. Make Timely Credit Card Payments 

Another way you can lower your credit utilisation ratio is by paying off the existing dues. Try to pay more than the minimum amount so that you can pay off the debt faster and lower the credit utilisation ratio. 

To Conclude

A higher credit score will help you get financial perks like lower interest rates, approval for higher loan amounts, and more. Now that you know how your credit score can be affected by your credit utilisation ratio, make sure you maintain a low ratio of credit utilisation. If you are looking for flexible and secure loan options, explore Poonawalla Fincorp right away!

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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