Banks and lenders refer to your CIBIL Score to decide whether to approve or reject your credit application.
This all-important score is a three-digit number that reflects your creditworthiness, telling lenders how likely you are to repay your loans on time. Ranging from 300 to 900, the higher the score, the better your chances for approval with favourable terms and interest rates. A lower score, however, can mean rejection or a high-interest rate. You should aim to maintain a CIBIL Score of 750 or higher, which is considered ideal.
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So, how is your CIBIL Score calculated?
Five major factors contribute to your credit score: your payment history, credit utilisation ratio, length of credit history, credit mix, and credit enquiries. Generally, credit utilisation accounts for a significant 30% of your score. So, let us dive in and explore this critical aspect of credit management.
What is the credit utilisation ratio?
Simply put, the credit utilisation ratio refers to the amount of credit you use compared to the credit limit available to you per month. For instance, if you have a credit card with a limit of Rs. 50,000 and you use Rs. 25,000 of it in a month, your credit utilisation would be 50%.
Now, you must be wondering, how does credit utilisation affect your CIBIL Score? Well, when you use credit, you borrow money from a lender on the condition that you will pay it back within a specific timeframe. Since your credit utilisation shows how much of your available credit you are using, if you are using a large chunk of it, it might indicate that you rely too heavily on credit to make ends meet and are struggling with your finances.
A high credit utilisation ratio is a red flag for lenders, and they are generally hesitant to extend credit in such situations because they will view you as a high-risk borrower. On the other hand, a low credit utilisation signals how responsible you are with credit, thereby boosting your CIBIL Score.
Think of it like this: your credit limit is like the maximum storage space on your phone. Just like you need to use some of that storage space to run apps and save photos so that your phone can work for you, you need to utilise some of the available credit to show that you can handle credit responsibly. But just like you would not want your phone storage to be completely full and cause a lag, you should not use too much of your available credit and drag your CIBIL Score down.
Is there an ideal credit utilisation?
Most experts recommend keeping your credit utilisation below 30%. That is, not spending more than Rs. 15,000 out of your Rs. 50,000 credit limit. The lower your credit utilisation, the better it is for your credit score. Aim to keep it as low as possible while still using your credit card responsibly. This means only charging what you can afford to pay off each month and avoiding carrying a balance if possible. This will positively impact your CIBIL Score and increase your chances of getting approved for credit and loans in the future.
What can you do if your credit utilisation ratio is too high?
Since the credit utilisation ratio is a factor that changes every month, it does not mean that your CIBIL Score is forever ruined if you have a high credit utilisation for one month.
However, lenders are not too keen on those who appear credit-hungry, as they doubt the repayment capacity of such individuals. So, what can you do to improve your credit utilisation and boost your CIBIL Score? Here are a few of your options:
- Pay off your credit card balances so that you are using less of your available credit.
- Request a credit limit increase from your lender, which will bring down your credit utilisation ratio.
- Get a second credit card to help you increase your total credit limit and lower your credit utilisation ratio.
- Do not close old credit accounts, as it not only shortens your credit history but also brings down your credit limit and increases your credit utilisation ratio.
However, keep in mind not to increase your spending as your credit limit increases. If you fail to manage your spending, this will again spell trouble for your CIBIL Score.
Remember, mindful and responsible credit behaviour will always hold you in good stead and help you maintain a good CIBIL Score. Bajaj Finserv Credit Pass can help you manage your credit accounts and track the factors that impact your CIBIL Score effectively. Use the handy tips and predictive tools to make informed credit choices. And always stay on top of your financial health with access to your real-time credit dashboard and unlimited credit score checks.
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