Imagine you have a credit card with a limit of ₹1,00,000, but each month, you tend to spend around ₹60,000. That’s a 60% credit utilisation ratio, which shows that you are heavily dependant on borrowed money, instead of just your monthly income.
According to the Times of India, credit utilisation contributes to about 30% of your credit score calculation. Keeping this percentage low ideally under 30% is essential. For example, if you reduce your balance to ₹30,000, you’d be at a safer 30% utilisation rate.
But why is this percentage so important, and how does it affect your ability to get personal loans? Let’s explore.
What is Credit Utilisation?
Credit utilisation is simple. It’s the percentage of your available credit that you’re using.
Let’s say you have two credit cards—one with a limit of ₹50,000 and another with ₹1,00,000. If your total spending across both cards is ₹45,000, your overall credit utilisation is 30% (₹45,000 out of ₹1,50,000).
This percentage shows lenders how dependent you are on credit. The lower your utilisation, the better you look to lenders, and it can positively affect your eligibility for personal loans.
How Credit Utilisation Affects Your Credit Score
Your credit utilisation ratio plays a big role in your credit score.
- When it’s high, it suggests you might be financially stretched, which can lower your score.
- On the other hand, a low ratio shows you’re managing credit responsibly.
Experts recommend keeping this ratio below 30% to maintain a healthy score. For example, if you have a ₹2,00,000 limit and spend ₹1,20,000, that’s 60% utilisation—too high for comfort.
Bringing it down to ₹60,000 keeps you at 30%, which is generally safer and can help you secure better rates on personal loans.
| Credit Limit (₹) | Balance (₹) | Utilisation (%) |
| 1,00,000 | 30,000 | 30% |
| 1,50,000 | 75,000 | 50% |
| 2,00,000 | 1,20,000 | 60% |
| 3,00,000 | 90,000 | 30% |
| 4,00,000 | 2,00,000 | 50% |
The table above shows different scenarios of credit utilisation. As you can see, keeping balances low on high-limit cards can significantly lower your utilisation ratio and improve your score.
Tips for Managing Credit Utilisation
Maintaining a low credit utilisation ratio is achievable. Here’s how:
- Make Partial Payments More Often: Pay off portions of your balance several times a month, not just when the bill is due.
- Request Higher Limits: Increasing your limit reduces your utilisation percentage if your spending habits remain the same.
- Avoid New Purchases: Try to minimize credit usage when you’re planning to apply for personal loans.
- Spread Purchases Across Cards: If you have multiple cards, splitting your expenses helps keep each card’s utilisation low.
Common Misconceptions About Credit Utilisation
It’s easy to get mixed up with credit utilisation myths. Here are a few:
- “Carrying a balance helps your score.” Wrong! Interest charges hurt your finances, not help your score.
- “Using all available credit builds history.” Using all your credit shows dependency, which is a red flag to lenders.
- “Closing unused cards helps credit.” Closing cards can hurt your score by reducing your total credit limit, which increases utilisation.
Why Credit Utilisation is a Smarter Focus than Increasing Limits
While raising your credit limit can help reduce utilisation, managing your spending is a better long-term approach. Having a high limit and still sticking to a low balance shows discipline, and lenders favour that.
Personal loans become more accessible when lenders see that you’re responsible with credit. Focus on low balances, not just high limits, for the best results.
Conclusion: Make Credit Utilisation Work for You
Credit utilisation isn’t just a number—it’s a reflection of how well you manage credit. By keeping utilisation below 30%, you can protect your credit score and increase your chances of getting personal loans with favourable terms.
So, next time you swipe, think about your utilisation percentage. Are you keeping it in check?
FAQs
What is a good credit utilisation percentage?
Keeping it below 30% is ideal for maintaining a good credit score.
Can a high utilisation ratio affect personal loan approval?
Yes, high credit utilisation may lower your credit score and impact loan approval.
How often should I pay off my balance?
Paying multiple times a month helps lower your utilisation ratio effectively.
Does closing a credit card impact my utilisation?
Yes, closing a card can raise your utilisation ratio if it reduces your total available credit.