Credit utilization ratio stands for ratio of monthly outstanding payment from your credit card with numerator and credit limit provided on your credit card as denominator. For example, if your credit card limit is Rs 50,000 and monthly outstanding payment on this card is Rs 20,000 then, your credit utilization rate would be 40%. If you hold more than one credit card then, aggregate ratio would be calculated for all cards.
There is huge relation between credit utilization rate and cibil score. It is estimated that credit utilization constitutes 30% of your overall cibil score. It is estimated that you should strive to maintain a credit utilization rate of under 30%. Before applying for a loan you can take help of online cibil score calculator to roughly estimate your cibil score. If your cibil score is not upto mark due to high credit utilization rate then, you can adopt following measures to safeguard yourself –
- Increase limit on your existing card–You can reduce your credit utilization rate by increasing limit on your existing credit cards. Banks would be more than willing to increase your credit limit if you have been diligent in past towards credit card debt payment. This will decrease your credit utilization rate.
- Get another card – You should also think about adding another credit card for yourself. This step will increase your total credit limit considerably without any considerable effort. A low credit utilization rate would automatically reflect in better cibil score.
- Payment alert– Usually, credit card holders pay their outstanding credit card balance though auto debit from their account on specified date. But, you can set an manual alert for yourself twice a month to pay from your own account rather than auto debit. This will greatly reduce your credit utilization rate and hence will result in good cibil score.
- Watch your behavior – You should check your credit card utilization frequently from time to time. You can check it regularly by logging in to your account and observing your past and current credit card behavior. By doing this, you prevent yourself from sudden high utilization rate that may impact your cibil score.
You can clearly see impact of credit utilization on your cibil score by going through calculations performed by any online cibil score calculator. Credit utilization is a major chunk of your cibil score calculations and you should take every measure to make sure that this aspect is not able to negatively impact your cibil score.