How to Calculate Your Credit Utilisation Ratio? A Simple Guide
Several factors shape your credit score, and one of the most important is something many people overlook: the credit utilisation ratio. If you’ve ever wondered what credit utilisation is or how to work it out for yourself, you’re in the right place.
In this guide, we’ll break down the credit utilisation meaning, why it matters, how to calculate it, and practical tips for keeping it healthy.
Why Credit Utilisation Ratio is Important
The impact of credit card utilisation on credit score is significant, sometimes more than people realise. Here’s why this single percentage holds so much weight:
- Shows financial discipline: A low utilisation ratio tells lenders you’re in control of your finances and not overspending. It shows you can manage available credit without becoming dependent on it.
- Direct effect on credit score: Credit utilisation is often one of the biggest components in credit score calculations. Even if you pay on time, high utilisation can lower your score. This is because high usage suggests you might be under financial pressure.
- Influences borrowing decisions: If your utilisation is consistently high, lenders may think you have limited repayment capacity, making them cautious about approving new loans or credit lines.
- Impacts interest rates and offers: Borrowers with a good credit utilisation ratio often qualify for better interest rates and more attractive offers. Lenders see them as low-risk customers.
- Acts as a quick-win factor: Unlike some credit score elements (like credit history length, which takes years to build), utilisation can be improved quickly. By reducing your usage, you might see positive changes in your score within a few months.
- Signals overall financial health: Low utilisation is often linked to better money management. It tells lenders that you’re not spending beyond your means and can handle your commitments.
In short, keeping your utilisation low is one of the fastest and most effective ways to maintain or boost your credit score.
Why Credit Utilisation Ratio is Important
The credit card utilisation impact on credit score is significant. Here’s why:
- Shows financial discipline: A low utilisation ratio signals that you’re not maxing out your credit.
- Direct effect on credit score: High utilisation can drag down your score even if you pay on time.
- Indicates repayment ability: Lenders see lower usage as a sign of controlled spending and stable finances.
- Helps in getting better loan terms: A healthy utilisation ratio can lead to easier approvals and lower interest rates.
Even if you always pay your bills on time, consistently using too much of your available credit can hurt your score. This is why many experts recommend keeping your good credit utilisation ratio under 30%.
How to Calculate Credit Utilisation Ratio
If you’re wondering how to calculate credit utilisation, here’s a simple way to do it:
1. Find your total credit limit
Add up the credit limits of all your cards and credit lines.
2. Find your total outstanding balance
Add up the amounts you currently owe across all those accounts.
3. Apply the formula:
Credit Utilisation Ratio= (Total Outstanding Balance ÷ Total Credit Limit) × 100
Example:
- Credit Card A Limit: ₹50,000 (Balance ₹15,000)
- Credit Card B Limit: ₹80,000 (Balance ₹40,000)
Total Credit Limit = ₹50,000 + ₹80,000 = ₹1,30,000
Total Balance = ₹15,000 + ₹40,000 = ₹55,000
Credit Utilisation Ratio = (55,000 ÷ 1,30,000) × 100 = 42.3%
This means you’re using 42.3% of your available credit, higher than the recommended good credit utilisation ratio of 30%.
You can regularly track your utilisation when you check your credit score through online tools that show your current credit usage.
How to Improve the Credit Utilisation Ratio
If your ratio is too high, don’t panic; there are easy ways to bring it down:
- Pay off balances more often: Instead of waiting for the due date, make small payments during the month to keep usage low.
- Increase your credit limit (responsibly): A higher limit can reduce your utilisation percentage, but avoid taking this as an excuse to spend more.
- Distribute spending across cards: Spreading your expenses across multiple cards keeps individual card usage low.
- Avoid maxing out any single card: Even if your overall utilisation is fine, one maxed-out card can still hurt your score.
- Track your spending: Keep an eye on balances to make sure they don’t creep up unexpectedly.
Over time, lowering your utilisation ratio can have a positive impact on your credit score and help you maintain a strong credit profile.
Final Thoughts: Keep Your Utilisation in Check
Your credit utilisation ratio is one of the easiest parts of your credit profile to control. Knowing how to calculate credit card utilisation and keeping it in the recommended range can have a big impact on your financial reputation.
Think of it this way: the less of your available credit you use, the better you look to lenders. Combine a low utilisation ratio with timely payments, and you’ll be on your way to a stronger credit score.
And remember, you can check your credit score online regularly to see how your utilisation, along with other factors, is affecting your overall rating.
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