Credit cardholders like to take advantage of instant credit to avoid the processing and approval process. However, your credit card CIBIL score is the ultimate factor making a difference in the loan sanction. It also affects your loan interest rate.
When you have the best credit card in India and use the credit limit continuously, it indicates something negative. It proves that you have no control over your finances. Thus, your credit limit based on the monthly usage of the credit is known as the credit utilization ratio. You may hurt your credit score by maxing out your credit limit.
The credit bureaus, namely CIBIL, Equifax, CRIF, and Experian consider your credit utilization ratio to decide on your score. They also focus on some other factors, including-
- Your new credit
- Length of your credit history
- Payment history
- The credit mix
Now, let us first have a brief concept about the credit utilization ratio.
Learn about credit utilization ratio
The credit utilization ratio should range from 30 to 40%. For instance, when your credit limit is Rs.90,000, you may use up to Rs.36,000. The amount of Rs.90,000 may be from a single card or multiple cards. While you have crossed the limit, it will affect your credit score.
In some cases, we think of stopping the use of our cards for higher credit card CIBIL scores. But, never think that it will solve your problem. It will create an impression that you have applied for a credit card without analyzing your financial status. Moreover, it proves your lack of financial responsibility.
Credit bureaus use the credit utilization ratio for your credit calculation. The lower ratio results in a higher credit score. Credit bureaus apply some unique techniques to assess your credit card CIBIL score. It may not always be easy for you to identify how they decide on the final ratio. Interestingly, credit bureaus have not mentioned anything about the best credit utilization ratio.
Relation of credit utilization ratio and your credit card CIBIL score
The major goal of credit bureaus is to know your capability of repaying your loan. Credit scores give you an opportunity of getting the appreciation of creditors. A lower CIBIL score indicates a lower chance to repay the loan.
Thus, a high credit utilization ratio proves a higher craving for credit. Most importantly, bureaus will think of your dependency on credit. To say simply, higher credit utilization denotes something negative and signifies your repayment potentials.
When the ratio is high for one to two months, you will have no effect on the score. But, a consistently high ratio will result in an adverse situation.
You may have paid your credit card bills at the right time. Still, why should there be a problem with the credit utilization ratio? You can claim that your credit bureau must evaluate your credit usage without checking your bank balance. But, you have enjoyed interest-free credit and card benefits using your credit card. Choose the debit card for payment and not your credit card.
Your claims about the credit utilization ratio may be right. However, the bureaus do not find much relevant detail about you. They have no information related to your net worth and bank account balance. Your financial institutions will not share these details.
The basic information available to credit bureaus is about your loans and credit cards. CIBIL and other bureaus calculate the credit score by analysing your-
- Credit balance
- Credit inquiries
- Payment history
- Types of credit
The bureaus do not learn about your on-time payment. That is why your CIBIL score for the best credit card in India will be low when the credit utilization level is high.
Why should you focus on the credit utilization ratio?
The higher credit utilization ratio can cause a lower credit status. The ratio of about 30% is an alarm. When it is more than 50%, your credit score will be low. Thus, to achieve a higher and better ratio, you must focus on the credit utilization ratio. But there are some other reasons to give importance to this ratio.
- You may not get loan approval
While applying for any loan, your creditor will like to know your credit status. The credit utilization ratio, which is over 50% of the overall credit limit, will make you a risky customer to the lender. The lender will not accept your application, and you will need to pay a higher interest rate.
- You have to pay a high cost
By having several credit cards, you can please your financial institution. However, when you have crossed the credit limit and cannot repay on the limit, lenders will charge high interest. The loan interest rate can range from 30 to 40%. You will ultimately end up paying a high amount.
- Risk of a debt trap
You must not use your credit card until you have cleared your debt. Moreover, you may try to pay a good amount every month.
Finally, we can say that the smartest solution is to raise the credit limit. You can call your card issuer to do this for you. There is no need to apply for another card. You can choose Bajaj Finserv RBL Bank SuperCard as it is widely accepted as the best credit card in India, with benefits such as – effortless EMI conversion, emergency advance, ATM cash withdrawals, huge annual savings, reward points on every swipe etc.