Tips to Manage Credit Utilisation Rate to improve the cibil score


credit scoreQ1. What is the credit utilisation rate?

Credit Utilisation Rate or Credit Utilisation Ratio is simply the percentage of a borrower’s available credit that he or she has exhausted. It is deeply correlated to cibil score.

Q2. How is the credit utilisation rate calculated?

Here’s an example of how Credit Utilisation Scores are calculated:

Card 1: Credit line INR 5,000, balance INR 1,000

Card 2: Credit line INR 10,000, balance, INR 2,500

The borrower’s total credit line across two cards is 5,000+10,000=15,000. The total credit used is cibil score1,000+2,500=3,500.

Credit utilisation ratio = Credit Used/Total Credit Line = [3,500/15,000] = 23.34%.

Q3. Why does Credit Utilisation Rate matter?

Credit utilisation rate tells the potential lenders how much debt the borrower is carrying and how much of available credit is he or she consuming. The lower your credit utilisation rate, the more attractive it is to the lenders—because it’s more likely that you’ll be able to make timely payments on your new debt. Also because of this, your cibil score will be higher.

faq4Q4. Per card versus overall credit utilisation—what is more important for cibil score?

Both are important. While evaluating a borrower’s profile, lenders take into account both aggregate utilisation and line-items utilisation. This is important, because if the borrower tries to avoid the negative effects of having a maxed out card by purchasing a new card and keeping its balance as INR 0, his or her cibil score and profile may still be affected by the high utilisation rate on that one card.

Q5. What is the relationship between cibil score and credit utilisation rate?

Credit utilisation is an important factor that credit scoring models use to calculate the cibil score. Lenders avoid borrowers with high utilisation rates, because that entails faq3a higher chance that the debt will not be repaid. Keeping your credit utilisation rate under 30% is an acceptable goal to aim at!

Q6. How can a borrower improve credit utilisation rate?

If credit utilisation rates are extremely high, lenders may be reluctant to issue new cards to him or her. One way to reduce the utilisation rate is to ask the card issuer to increase credit limit. It may not always work, but it’s definitely worth a shot. Be sure not to overspend once your limit has been raised because it would have adverse effects on the cibil score.

faq6Q7. Can credit utilisation rate change without notice?

Yes. The company issuing the credit card has the right to lower the credit limit without prior notice. This will inevitably lead to a rise in credit utilisation rate and will have an immediate impact on your cibil score.