10%? 30%? 40%? I don’t think there is a crisp answer to this. Clearly, lower the better.
Let’s first understand what is credit utilisation ratio and how it is calculated. Then, we get down to what is a healthy credit utilisation ratio and the different ways to improve the ratio.
What Is Credit Utilisation Ratio?
You own 3 credit cards with credit limits of Rs 2 lacs, 3 lacs, and Rs 5 lacs.
Your outstanding card balance is Rs 20,000 on the first card, Rs 40,000 on the second card and Rs 90,000 on the third card.
Total utilisation = 20,000 + 40,000 + 90,000 = Rs 150,000
Total Credit limit = Rs 2 lacs + Rs 3 lacs + Rs 5 lacs = Rs 10 lacs.
Credit utilisation ratio = Rs 150,000/10 lacs = 15%
Why Is Credit Utilisation Ratio (CUR) Be Important?
From the perspective of banks and credit information companies, it tells them how hungry you are for credit. No better way to assess your hunger than by comparing your card utilisation against sanctioned credit limits.
If you are too hungry, then the banks may not be comfortable lending to you. Why? Because the banks think if you are borrowing too much, you may struggle to pay the borrowed amount back. That’s a fair thought.
Therefore, if the banks are not comfortable lending to people with high credit utilisation ratios, then the credit score should reflect this discomfort by penalising credit scores of borrowers with high credit utilisation ratios.
Clearly, low credit utilisation ratios are good for your credit score. Since the credit score methodologies are proprietary, I am not aware of the quantum of impact.
Note that a low utilisation is better than zero utilisation. Why? Well, if you are not utilising credit facilities, how would credit bureaus form an opinion about your credit behaviour? And if it can’t form an opinion, it can’t give you a good score.
How High Is High Credit Utilisation?
From the articles from Experian and CIBIL, it appears (up to) 30% is healthy. While there is no mention of a hard threshold, I think it still makes sense to keep it below 30%.
Note credit score methodologies are proprietary and can vary across credit bureaus (credit information agencies). It is possible that the credit bureaus also allot weightage to the highest utilisation on a card level (and not just the overall utilisation levels).
We continue with the same example (cards with credit limit of Rs 2 lacs, 3 lacs, and 5 lacs).
Case 1: Utilisation of Rs 40,000, Rs 60,000 and Rs 100,000 (or 20% of each of the cards)
Case 2: Utilisation of Rs Rs 150,000, Rs 20,000 and Rs 30,000 (credit utilisation ratios of 75%, 6.7%, 6%)
The total credit utilisation ratio is the same in both cases. 2 lacs out of Rs total credit limit of Rs 10 lacs. Still, it is possible that a particular methodology penalizes high utilisation on individual card (despite normal utilisation overall).
I reproduce the following data from Experian for US card holders.
While this is useful data, do not reach wrong conclusions from the above tabulation.
This table merely shows average credit utilisation ratios for various FICO score ranges. And we can see borrowers with low utilisation levels tend to have better credit scores. This does not mean that the higher utilisation alone has affected the credit scores.
You can expect people with poor credit scores to be grappling with many financial problems that affect credit score. Payment defaults, delayed payments etc. Higher credit utilisation may just be a manifestation of these far bigger problems.
How to Lower Your Credit Utilisation Rate?
#1 Spend less on credit cards
This will automatically reduce the credit utilisation ratios.
#2 Paying bills on time, early if possible
It is important to note that credit bureaus calculate credit scores based on data shared by the card issuing banks.
As per RBI regulations, the banks must report data to credit information companies every fortnight (15 days). The banks must adhere to this reporting frequency by January 1, 2025.
Now, the banks may report the credit limit and the utilisation levels as on the day of reporting. Therefore, if you pay your bills early, there is a chance that your card utilisation level is low on the day of reporting.
This may seem like an overkill, but it may help. In any case, I am not a big fan of paying your card bill on the last day.
You must pay your bill on time (if not early). Non-payment of card bill will impact credit score much more adversely when compared to a high utilisation ratio.
#3 Pay your bill in full
Makes sense too.
If you are not paying the card bill in full and revolving credit, then your card utilisation ratio will obviously be higher.
You have not been able to pay the previous month’s expenses. You will add more expenses this month. You lose the benefit of interest-free credit period. Interest will accrue. All these things add up.
Paying credit card dues in full is way more important than trying to manage your credit utilisation ratio.
#4 Ask bank to increase your credit limit or get a new card
I wouldn’t suggest this. This is about getting obsessed with credit utilisation ratios.
Still, since there is a numerator and a denominator, increasing the denominator will improve your credit utilisation score.
#5 Spread your expenses across cards
As discussed earlier, credit bureaus may consider utilisation ratios at both individual and overall levels while assessing your credit scores.
Hence, spreading your expenses across multiple cards (if you have more than 1 credit card) may help.
#6 Convert card outstanding into a loan
As I understand, for the purpose of calculating credit utilisation ratio, only the revolving debt (credit cards) is considered. EMI-based loans are not considered.
If you are struggling to pay credit card debt in full, it is anyways a good idea to request the bank to convert card outstanding into a loan. If the bank agrees, this may not only reduce the cost of loan and the cashflow pressure but also improve credit utilisation ratios.
#7 Do not close old cards
By doing this, you bump up the denominator which will reduce your utilisation ratios.
By not closing old cards (that you no longer use), you may improve utilisation ratio (lower is better). However, I am not sure if this is a good idea. By keeping cards that you don’t use or track open, you may invite problems in some form or the other.
While I have discussed ways to keep credit utilisation ratios under check, I am not sure of the efficacy of the various methods.
I think you just need to get your basics right. Just pay on credit bills in full on time. This alone should keep credit score healthy. A high credit utilisation ratio once in a while may affect your score only slightly. Personally, I wouldn’t bother too much about just this.