Tips to Manage Credit Utilisation Rate to improve the cibil score

Credit utilization rate is the percentage of the borrower’s credit that they have exhausted. They are being calculated by adding the credit used by the borrower and then dividing them up by the total credit line among all the cards that they possess. In simple words, it basically tells how much the borrower has used the credit. The lower the credit utilization ratio, the better he is in the eyes of the lenders.

Q1. 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.

I read an article on credit utilization rate on http://www.loankuber.com/. It helped me clear my basics on this topic. I also got to know that while evaluating a borrower’s profile, the lenders take into account both the per card rate and the aggregated cards rate. This article also focused upon the relationship between credit cards and cibil score, and how they are linked to each other. It is always recommended to use the limit upto 30% so that your scores are high.

Also when the credit card ratio increases, it becomes very difficult to correct it. Though it can be done by raising the credit card limit.

And the most important fact that the credit card holders should keep in mind is that the banks could lower down the credit card limit. So it really important to be aware all the time.

It is more or less a nightmare for a person to have a bad credit report.