Credit Card Utilization: A Key Indicator of Credit Health and Scoring Impact

Credit Utilisation: A Key Factor in Credit Scoring

Credit utilisation is a crucial aspect of credit scoring that lenders pay close attention to, often overlooked by individuals. While paying bills on time is essential, consistently high credit utilisation can negatively impact credit scores, even if payments are made on time.

Understanding Credit Utilisation

Credit utilisation measures the percentage of available credit being used. For example, if a credit card limit is Rs 1 lakh and the outstanding balance is Rs 25,000, the utilisation is 25%. If the balance increases to Rs 85,000, the utilisation jumps to 85%. Lenders view individuals who regularly use most of their limit as financially stretched.

Read also: Correcting Credit Score Errors: A Guide to Ensuring Accurate CIBIL Reports and Optimal Loan Eligibility

The Risks of High Credit Utilisation

High credit utilisation can make lenders uneasy, as it suggests reliance on credit to manage expenses. Even if payments are made on time, high utilisation can indicate a lack of financial flexibility to handle unexpected expenses. As a result, credit scoring models penalise consistently high utilisation.

The 30% Rule

While not a rigid rule, keeping credit utilisation below 30% is a useful guide. For example, if the credit limit is Rs 1 lakh, lenders are more comfortable seeing balances of around Rs 30,000 rather than Rs 80,000 or Rs 90,000. Occasional high utilisation is not a disaster, but a consistent pattern can harm credit scores.

Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile

Managing Credit Utilisation

To maintain a healthy credit profile:

• Make partial payments before the billing cycle closes to keep reported balances lower.
• Spread spending across multiple cards to avoid high utilisation on a single card.
• Consider asking the bank for a higher credit limit, which can automatically lower utilisation if spending remains the same.

Conclusion

Credit utilisation is a critical factor in credit scoring that can easily be ignored. However, lenders closely monitor it, and running close to credit limits can negatively impact credit profiles. By maintaining a healthy credit utilisation ratio, individuals can strengthen their credit profile and improve their chances of securing loans in the future.