Credit card holders are increasingly viewing credit cards as a convenient payment option in case of cash crunch. The financial tool gives consumers the option to pay later for their purchases or to convert large amounts into Equated Monthly Instalments (EMIs). While credit cards provide a lot of benefits, people may sometimes forget to keep certain basic pointers in mind while using them. This may negatively impact your credit score.
One such factor is credit utilisation ratio. Keeping your credit utilisation score low is essential to lowering your expenses and improving your credit score.
What is the credit card utilisation ratio?
The term refers to the outstanding balances on your credit card with respect to the total credit available to you. The credit utilisation ratio is calculated by dividing the total credit card balances by the credit card limit and then multiplying the figure by 100.
What is an ideal credit utilisation ratio?
Ideally, a person’s credit utilisation ratio should be within 30 per cent.
How to lower credit utilisation ratio?
A low credit utilisation ratio is beneficial in many respects. Here are some tips to reduce this ratio.
Keep track of your expenses: Make sure you keep a check on your spending regularly so that you can see how much your limit is left. If you regularly track your expenses, you will be able to work out which things you can go without and how much you are able to save after your credit card repayments.
Increase your credit limit: You can opt for increasing your credit limit to lower your credit utilisation ratio. This can be done by going in for a new credit card or requesting your card issuer to increase your credit limit. A request for an increase may initiate an inquiry into your profile, which can lower your credit score temporarily. But, the score will soon go up if the bank approves your request.
Don’t close any unused cards: If you have any credit card that you are not utilising, do not close them. These idle credit cards may boost your credit utilisation score and improve your credit score.
Pay off any pending balances: The more pending dues you have, the higher will be your credit utilisation ratio. To reduce the figure, you should pay off the balances, or at least part of them. This can open up considerable limits on your card.
Using these tips will help you reduce your credit utilisation ratio to a more favourable one. This, in turn, will help you get loans at a lower rate of interest and negotiate better terms for any future credit.