Using Full Credit Card Limit Can Negatively Impact Credit Score

Credit Utilisation: The Hidden Threat to Your Credit Score

Credit utilisation is a critical factor in determining your credit score, and it's often misunderstood. While making timely payments is essential, using too much of your available credit limit can still negatively impact your score.

What is Credit Utilisation?

Credit utilisation measures the percentage of your available credit limit being used at any given time. For example, if your credit card limit is Rs 1 lakh and you consistently use 80-90% of it, you're in trouble, even if you pay all your bills on time.

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

Why High Utilisation Matters

From a lender's perspective, credit utilisation indicates your financial breathing room. Maxing out a card, even if you pay it off, suggests stress and reliance on credit for regular expenses, not just emergencies. Credit scoring models reward restraint, and high utilisation can lead to a lower score.

The Timing Trap

Many cardholders believe they're safe by clearing their full bill every month. However, banks report balances to credit bureaus on a fixed date, not the payment date. If your card is maxed out when the statement is generated, that high balance gets reported, even if you pay it off later.

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

The Impact of a Single Card

You don't need to max out all your cards to see an impact. A single heavily used card can hurt your overall utilisation, especially if your total credit limit is low. This is common with people who have one old card with a modest limit.

Best Practices for Using Credit Cards

To avoid hurting your score:

• Keep utilisation below 30% (below 20% is even better if you're planning a loan application soon).
• Make a part payment before the statement date to help manage utilisation.
• Consider asking for a limit increase to improve your utilisation ratio.

By understanding credit utilisation and following these best practices, you can use credit cards responsibly and maintain a healthy credit score.