How Does Credit Utilization Affect Your Credit Score?

Credit Utilization refers to the portion of your credit limit that you spend in each billing cycle. If your credit limit is Rs. 100, it doesn't mean that the entire money is yours to spend. What if you can't afford to repay? What if you are overspending without reason? A borrower is expected to be mature and spend responsibly.


Your credit utilization rate reflects your spending habits, and thus credit bureaus treat it as an important determinant while calculating your credit score.

If you wish for a good credit score, you better keep your credit utilization rate healthy. Most financial advisors say that a credit utilization of 30% and below is ideal for your credit health. Read on to know more.

How to Calculate Credit Utilization

Let's say that you have a credit card with a credit limit of Rs. 1,00,000. You have made a purchase worth Rs. 30,000 using the same credit card. The ratio between these two is your credit utilization. To put it lucidly, it refers to the amount or percentage of your credit limit that you have used. In this case, it is 30%. Here is how you can calculate your credit utilization:
(30,000/1,00,000) * 100 = 30%
In case you have multiple credit cards, you can add the balances in each card to get your total credit balance. Similarly, add the credit limit on each card to get the total credit limit. Now apply the formula to these new numbers to find your overall credit utilization rate.

Why Does Your Credit Utilization Affect Your Credit Score?

Lenders refer to your credit score to judge your creditworthiness. Credit utilization being a valid indicator of the same, it affects your credit score. Your credit utilization rate indicates if you are a lending risk. According to the lenders, if you exceed your credit limit regularly, you are more likely to have difficulty repaying the money. However, if you spend less and pay off your balance in full every month, lenders will consider you to be more reliable with credit.

How Does Your Credit Utilization Affect Your Credit Score?

Low credit utilization is the best way to maintain a high credit score. It shows that you are keeping your expenses within limits by using a small amount of credit. A low utilization rate, not exceeding 30%, is considered best for your credit score.

The credit utilization ratio in each of your credit cards is taken into account by the credit bureaus to determine your credit score - individually as well as collectively. All these can make the calculation quite complicated. You can always try mymoneykarma’s Intelligent Finance Tool for regular tracking.
A high rate of credit utilization will bring down your credit score. It indicates that you are overspending and might not be able to pay your bills on time. If you don't manage to repay on time, a high rate of interest is applied to the principal borrowed amount. So you would be paying more than you had actually borrowed, and your funds will gradually deplete. In the long run, your pocket will have way less money.

How Do You Reduce Your Credit Utilization Rate?

You could follow these simple steps to reduce your credit utilization rate:

Pay Your Credit Balance More Than Once a Month

The credit card issuing companies typically report your credit balance to the credit bureaus at the end of your billing cycle. You need not be worried about how much you are spending each month. If you pay a part, or preferably all, of your outstanding balance before the issuing companies report your credit balance, your credit utilization rate for the concerned cards will remain low.

Paying the balance in full each month positively impacts your credit score. It also shows that you can borrow money responsibly and stay within the limits of your affordability. It makes you a creditworthy borrower in the eyes of a lender.

If your credit utilization rate tends to shoot up, you should try to balance it by making multiple payments each month. Reduce your credit utilization rate as much as possible - preferably below 30%, which is considered healthy for your credit score.

Let's say your credit limit is Rs. 1,00,000. You have spent around Rs. 50,000. The card issuer will report your credit utilization at 50% in your monthly statement, bringing down your credit score.
However, if you pay off Rs. 25,000 before the statement is generated, your credit utilization will be reduced to 25% in your statement, thereby boosting your credit score. Before you proceed with this strategy, you must get in touch with your card provider and find out when exactly they report your information to the credit bureaus.

What is Credit Utilization? - What Is a Good Level of Credit Utilization?

Temptations are hard to resist. When you subscribe to a new credit card (especially your first credit card), a whole new avenue of potential expenditure opens up before you with a warm smile and welcoming arms. You suddenly find a lot of "free money" inviting you to spend them. Being a newbie, you might not even know how the credit system works.

You give in to the lure and land in trouble. If this hasn't been the story of your life, then I salute your discipline and self-control. However, if you feel that you could fall prey to similar temptations, read this article for some essential tips to manage your finance well.

Many credit card users fail to understand the concept of credit utilization. Let's quickly acquaint ourselves to it.

What is Credit Utilization?

Let's say that you have a credit card with a credit limit of Rs.1,00,000. You have made a purchase worth Rs.30,000 using the same credit card. The ratio between these two values is your Credit Utilization. To put it lucidly, it refers to the amount or percentage of your credit limit that you have used. In this case, it is 30%. Here is how you can calculate your credit utilization:

( 30,000 / 1,00,000 ) * 100 = 30%

If you have multiple credit cards, you can add the balances in each card to get your total credit balance. Similarly, add the credit limit on each card to get the total credit limit. Now apply the formula to these new numbers to find your overall credit utilization rate.

How Does My Credit Utilization Affect My Credit Score?

Low credit utilization is the best way of maintaining a high credit score. It shows that you are keeping your expenses within limits by using a small amount of credit. A low utilization rate, not exceeding 30%, is considered best for your credit score.

The credit utilization ratio in each of your credit cards is taken into account by the credit bureaus to determine your credit score - individually as well as collectively.

Negative Impacts of High Utilization Rates

A high rate of credit utilization will bring down your credit score. It indicates that you are overspending and might not be able to pay your bills on time. If you don't manage to repay on time, a high rate of interest applies to the principal borrowed amount. So you would end up paying more than what you have actually borrowed, and your funds will gradually deplete, leaving you with less money in your pocket in the long run.

Tips for Maintaining the Right Percentage of Utilization

Now that you know that you should cap your expenses within a 30% credit utilization rate, you might as well go through these quick tips to help you with it.

• Multiple Credit Cards: Let's say your monthly credit card expense is Rs.50,000. You have a single credit card with a credit limit of Rs.1,00,000. It means that your credit utilization rate is 50%, which might be harmful to your credit score. Solution? Take another credit card; spend from both, ensuring that you don't cross your monthly quota of Rs.50,000. Your credit utilization rate drops to 25%, which would not be detrimental to your credit score.
  
  
• Pay Bills More Frequently: If your credit card bill tends to shoot up by the end of your billing cycle, you should make payments more than once per month. This will balance out the excess credit utilization.
  
  
• Increase Your Credit Limit: Ask your card issuing company to increase your credit limit. If you have used your credit card responsibly and if your credit score meets their requirements, you might be eligible for a higher credit limit. Once done, your average credit utilization will drop. It could be a more suitable option than taking a new card, as a new credit card might bring along an extra subscription fee. However, you need to keep two things in mind: don't increase your expenses; also remember that an application for a new line of credit calls for a hard inquiry, which negatively impacts your credit score.
  
  
• Keep Your Utilization Above Zero Percent: You might freak out by the complications and decide not to use your credit card at all. Sounds sensible, right? Well, absolutely not! Banks are here for business. The banks don't profit if you keep your credit card locked up in a safe. They want you to use your credit card responsibly, not avoid it altogether. You must use your credit card to be creditworthy, but at the same time, you must not overuse it.

Why the 30% Rule of Thumb Could Be Costing You

More often than not, the standard rule of thumb on the use of credit cards stands in the way of the account holder getting the best loan terms. Banks and others may advise you to keep revolving your debt as long as it is below 30% of your credit score. This is so that the credit utilization rate does not prove to be detrimental to your credit score.

What is Credit Utilization? - How to Lower Credit Card Utilization

Let's say that you have a credit card with a credit limit of Rs.1,00,000. You have made a purchase of Rs.30,000 using the same credit card. The ratio between these two is your credit utilization. To put it lucidly, it refers to the amount or percentage of your credit limit that you have used. In this case, it is 30%. Here is how you can calculate your credit utilization ratio:

(30,000/1,00,000) * 100 = 30%

If you have multiple credit cards, you can add the balances in each card to get your total credit balance. Similarly, add the credit limit on each card to get the total credit limit. Now apply the formula to these new numbers to find your overall credit utilization rate.

This calculation is based on your credit report, which is a detailed report of your credit history. A credit bureau (TransUnion, Equifax, Experian, etc.) prepares the credit report based on the information they get from your credit card issuing company. The calculation adheres to each card's billing cycle. While calculating your credit score, the credit bureaus consider your balance and credit limit as per the closing date mentioned in your credit card account statement.

How Does Credit Utilization Affect My Credit Score?

A lower credit utilization ratio is the best for maintaining a high credit score. It shows that you are keeping your expenditure within limits by using a small amount of credit. A high utilization rate indicates that you might not be able to pay your bills on time; therefore, a lower utilization rate - not exceeding 30% - is generally best for your credit score.

You must remember that the credit utilization ratio in each of your credit cards is taken into account, individually as well as collectively, to determine your credit score.

Reducing the Credit Utilization Rate

1. Pay Your Balance Early: The credit card issuing companies typically report your credit balance to the credit bureaus at the end of your billing cycle. You need not be worried about how much you are spending each month. If you pay a part, or preferably all, of your outstanding balance before the issuing companies report your credit balance, your credit utilization rate for the concerned cards will remain low.
   
   
2. Reduce Spending: If you notice that it's getting difficult for you to pay your credit card bills on time, you must stop making purchases with your credit cards. The new purchases made may increase your credit utilization ratio, which in turn will reduce your credit score. Use cash or a debit card at this juncture. As you clear off your existing debt, your credit utilization rate might drop and give a boost to your credit score.
   
   
3. Increase Your Credit Limit: A higher credit limit automatically brings down your credit utilization rate, provided that your expenditure or credit balance remains constant.
   You may call your credit card issuing company and request for an increase in the credit limit, or make an application online. However, increasing your credit limit isn't a piece of cake, and you might have to go through a rough road.
   There might be certain requirements that you need to qualify to get your credit limit increased. You might be required to have maintained your account for a specific period; your payment history might be scrutinized; and your credit score must be good enough for a raise in credit limit. At the same time, this request might be treated as a hard inquiry even if it goes unapproved. The inquiry itself could slightly reduce your credit score. You need to assess your chances carefully before taking a decision.
   
   
4. Open New Credit Card Accounts: If you get a new credit card, you will essentially increase your credit limit. If you keep a check on your expenditure, there is a good chance that your Credit Utilization ratio will come down. However, the application will be treated as a hard inquiry. In case the application is rejected, your credit score will be hampered.
   
   
5. Avoid Closing Old Credit Card Accounts: Well, if you ever get into a "Cleaning spree" and decide to close credit cards that are old and unused, stop yourself immediately. It might open up some free space in the card-holder section of your wallet, but at the same time it will cut down your total credit limit, thereby increasing your credit utilization ratio.

How to Lower Credit Card Utilization - Reducing the Credit Utilization Rate

What is Credit Utilization?

Let's say that you have a credit card with a credit limit of Rs.1,00,000. You have made a purchase of Rs.30,000 using the same credit card. The ratio between these two is your credit utilization. To put it lucidly, it refers to the amount or percentage of your credit limit that you have used. In this case, it is 30%. Here is how you can calculate your credit utilization ratio:

(30,000/1,00,000) * 100 = 30%

If you have multiple credit cards, you can add the balances in each card to get your total credit balance. Similarly, add the credit limit on each card to get the total credit limit. Now apply the formula to these new numbers to find your overall credit utilization rate.

This calculation is based on your credit report, which is a detailed report of your credit history. A credit bureau (TransUnion, Equifax, Experian, etc.) prepares the credit report based on the information they get from your credit card issuing company. The calculation adheres to each card's billing cycle. While calculating your credit score, the credit bureaus consider your balance and credit limit as per the closing date mentioned in your credit card account statement.

How Does Credit Utilization Affect My Credit Score?

A lower credit utilization ratio is the best for maintaining a high credit score. It shows that you are keeping your expenditure within limits by using a small amount of credit. A high utilization rate indicates that you might not be able to pay your bills on time; therefore, a lower utilization rate - not exceeding 30% - is generally best for your credit score.

You must remember that the credit utilization ratio in each of your credit cards is taken into account, individually as well as collectively, to determine your credit score.

Reducing the Credit Utilization Rate
 

• Pay Your Balance Early: The credit card issuing companies typically report your credit balance to the credit bureaus at the end of your billing cycle. You need not be worried about how much you are spending each month. If you pay a part, or preferably all, of your outstanding balance before the issuing companies report your credit balance, your credit utilization rate for the concerned cards will remain low.
• Reduce Spending: If you notice that it's getting difficult for you to pay your credit card bills on time, you must stop making purchases with your credit cards. The new purchases made may increase your credit utilization ratio, which in turn will reduce your credit score. Use cash or a debit card at this juncture. As you clear off your existing debt, your credit utilization rate might drop and give a boost to your credit score.
• Increase Your Credit Limit: A higher credit limit automatically brings down your credit utilization rate, provided that your expenditure or credit balance remains constant.
• You may call your credit card issuing company and request for an increase in the credit limit, or make an application online. However, increasing your credit limit isn't a piece of cake, and you might have to go through a rough road.
• There might be certain requirements that you need to qualify to get your credit limit increased. You might be required to have maintained your account for a specific period; your payment history might be scrutinized; and your credit score must be good enough for a raise in credit limit. At the same time, this request might be treated as a hard inquiry even if it goes unapproved. The inquiry itself could slightly reduce your credit score. You need to assess your chances carefully before taking a decision.
• Open New Credit Card Accounts: If you get a new credit card, you will essentially increase your credit limit. If you keep a check on your expenditure, there is a good chance that your Credit Utilization ratio will come down. However, the application will be treated as a hard inquiry. In case the application is rejected, your credit score will be hampered.
• Avoid Closing Old Credit Card Accounts: Well, if you ever get into a "Cleaning spree" and decide to close credit cards that are old and unused, stop yourself immediately. It might open up some free space in the card-holder section of your wallet, but at the same time it will cut down your total credit limit, thereby increasing your credit utilization ratio.

How to Find the Perfect Credit Card - Apply for Credit Card

Choosing a credit card can be very confusing. There are countless credit cards available on the market, offering different tempting schemes. It is natural for you to get baffled.

Well, there is no "best" credit card. Each person has different needs and preferences, and you must carefully evaluate yours to determine which card would work well for you. Financial experts at mymoneykarma can guide you on this journey.
Check Your Credit Report

The first and foremost job on your to-do list would be to check your credit score. By doing so, you will know which cards you are eligible for and accordingly eliminate the rest from your list of consideration. If you have an exceptional credit score, you will probably be eligible for almost all available credit cards, especially the ones with amazing perks. If you have a comparatively low credit score, your options would be less.
Generally, all the credit bureaus give you a free copy of your credit report once a year. You could also check your latest credit score for free with mymoneykarma's credit score tracker, or you could approach the credit bureaus and buy a copy of your credit report. If your scores aren't that bright and shiny, you should postpone your plans of getting a new credit card and instead focus upon improving your score in the meantime.
Identify Your Preference

You must narrow down on the exact reason for getting a credit card.
Are you trying to build your credit?
Are you planning to save some money on interest?
Are you looking for attractive rewards?
The card you choose must have features to meet your specific requirements. If you don't fly much, a card offering airlines privileges will hardly benefit you. Similarly, if you already have a stellar credit history, a secured credit card might not fit your purpose.
If you are a fresher in the credit world, you would want to build credit. Regular credit cards would be inaccessible to people with low credit scores. A student card or a secured credit card would be ideal for you. These are issued against some collateral (such as a fixed or a cash deposit), which you can get back once you have built enough credit to switch over to a regular credit card. Secured cards could be of use even when you are trying to rebuild a damaged credit history.
If your objective is to save on interest, you should opt for a low-interest card or a balance transfer card. Some people prefer using a credit card only during emergencies; a low-interest or 0% APR card would suit their purpose.

Some might have irregular income and thus carry a credit balance at times; this situation can be handled by a balance transfer card which can help settle high-interest debt easily and at lower interest rates. However, these cards might be inaccessible to those with a poor credit score.

If you are a smart user and know how to use credit cards responsibly, you should go for a rewards credit card. These cards typically have higher APRs, but you will never incur interest if you pay off your credit balance in full every month. These cards offer myriad rewards and benefits on every purchase you make.
Narrow It Down

Our website has an amazing section where you can look for the perfect card for you. Click here to access our flourishing list of available credit cards. Here are a few things that you must consider as you browse through the credit cards available for you.

What Is a Good Level of Credit Utilization? - Credit Utilization

You give in to the lure and land in trouble. If this hasn't been the story of your life, then I salute your discipline and self-control. However, if you feel that you could fall prey to similar temptations, read this article for some essential tips to manage your finance well.

Many credit card users fail to understand the concept of credit utilization. Let's quickly acquaint ourselves to it.

What is Credit Utilization?

Let's say that you have a credit card with a credit limit of Rs.1,00,000. You have made a purchase worth Rs.30,000 using the same credit card. The ratio between these two values is your Credit Utilization. To put it lucidly, it refers to the amount or percentage of your credit limit that you have used. In this case, it is 30%. Here is how you can calculate your credit utilization:

( 30,000 / 1,00,000 ) * 100 = 30%

If you have multiple credit cards, you can add the balances in each card to get your total credit balance. Similarly, add the credit limit on each card to get the total credit limit. Now apply the formula to these new numbers to find your overall credit utilization rate.
How Does My Credit Utilization Affect My Credit Score?

Low credit utilization is the best way of maintaining a high credit score. It shows that you are keeping your expenses within limits by using a small amount of credit. A low utilization rate, not exceeding 30%, is considered best for your credit score.

The credit utilization ratio in each of your credit cards is taken into account by the credit bureaus to determine your credit score - individually as well as collectively.

Negative Impacts of High Utilization Rates

A high rate of credit utilization will bring down your credit score. It indicates that you are overspending and might not be able to pay your bills on time. If you don't manage to repay on time, a high rate of interest applies to the principal borrowed amount. So you would end up paying more than what you have actually borrowed, and your funds will gradually deplete, leaving you with less money in your pocket in the long run.
Tips for Maintaining the Right Percentage of Utilization

Now that you know that you should cap your expenses within a 30% credit utilization rate, you might as well go through these quick tips to help you with it.

Multiple Credit Cards:
Let's say your monthly credit card expense is Rs.50,000. You have a single credit card with a credit limit of Rs.1,00,000. It means that your credit utilization rate is 50%, which might be harmful to your credit score. Solution? Take another credit card; spend from both, ensuring that you don't cross your monthly quota of Rs.50,000. Your credit utilization rate drops to 25%, which would not be detrimental to your credit score.

Pay Bills More Frequently:
If your credit card bill tends to shoot up by the end of your billing cycle, you should make payments more than once per month. This will balance out the excess credit utilization.

Increase Your Credit Limit:
Ask your card issuing company to increase your credit limit. If you have used your credit card responsibly and if your credit score meets their requirements, you might be eligible for a higher credit limit. Once done, your average credit utilization will drop. It could be a more suitable option than taking a new card, as a new credit card might bring along an extra subscription fee. However, you need to keep two things in mind: don't increase your expenses; also remember that an application for a new line of credit calls for a hard inquiry, which negatively impacts your credit score.

Keep Your Utilization Above Zero Percent:
You might freak out by the complications and decide not to use your credit card at all. Sounds sensible, right? Well, absolutely not! Banks are here for business. The banks don't profit if you keep your credit card locked up in a safe. They want you to use your credit card responsibly, not avoid it altogether. You must use your credit card to be creditworthy, but at the same time, you must not overuse it.

Do-It-Yourself - DIY Credit Repair

 Poor Credit Score

A credit score is a three-digit numeric that banks and other financial institutions consider determining the credit-worthiness of an individual.

On a numerical scale, a good credit score lies somewhere between the range of 700-800. On the other hand, if you have a credit score below 600, it’s high time that you ask yourself why you are within the ambit of poor credit.
How Does One Land in Bad Credit?

    A large number of missed payments - You may have missed some credit card or EMI payments in the past, due to which your credit score has decreased.

    High credit utilization rate - Credit utilization ratio = Credit card spending/credit card limit.
    If you spend more than 30% of the credit utilization limit, it reflects that you are credit hungry, and this can be the reason for a slump in your credit score.

    Multiple credit accounts - In case you have various credit cards and loan accounts, then it indicates that your debt to income ratio (DTI= Individual's monthly debt payments to monthly gross income) isn't maintained and you fulfill your obligations by borrowing money from several sources.

    Errors in the credit report - A credit report is a detailed document that comprises a consolidated record of your finances, such as credit card bill payments, EMIs, etc. which the banks provide to the credit bureaus. Thus, if you haven't checked your credit report for a long time, there is a possibility that at least some errors have gone unchecked in your credit report.

What Happens When You Have Bad Credit?

Disapproval of loan/credit card applications

Based on the credit score, lenders decide whether to take the risk of providing you with a credit or not. Thus, if you have a poor credit score, there are higher chances of rejection from credit card issuers, banks, and NBFCs.

High interest rates

Even if some lenders approve you for credit, they would compensate for the risk by charging a high-interest rate, which could put you in a huge debt trap.
DIY Credit Repair Tips

Credit repair is a process through which one’s credit score can be improved. It can either be done on your own or with the help of an expert, be it a qualified individual or an organization.

However, remember that it's not a one-day process and will take at least 6-12 months to show improvement. Now, if you choose to DIY, the following are the tips that you need to consider:

Monitor your credit report

With the significance of a credit report explained above, it is evident that you have to make sure that you check your credit report regularly. If you are thinking about where to get this report from, mymoneykarma is the answer. Check your credit report for FREE through our intelligent finance tool.

Once you check the report, if you come to notice errors, rectify them immediately by reporting to the credit bureau or the lender, depending on the severity of the mistake.

Clear your missed payments

In case you missed a few payments because of non-receipt of statements or forgetting the due date, don't think that clearing them will go in vain. Maybe your credit score will slump in one quarter, but as you pay the due amount, it will show a rise in the next quarter. Also, be diligent in paying the rest of the bills or EMIs, as that will maintain the lender's trust in you.

Beware of a hard inquiry

A hard inquiry is generated when you apply for a new line of credit. Thus, until your credit score improves, it is advisable to not apply for a new one, be it a credit card or loan. Even if you have a good credit score, too many hard inquiries can definitely affect it.

Resolve a dispute with the bank or other lenders

If you have missed or delayed payments due to a dispute with the credit card issuer regarding APR (Annual Percentage Rate) or any hidden costs, then resolve it to save your credit report from further negative remarks.

Buy a secured credit card

A secured credit card is designed for people who are looking to build their credit score. It is issued against a security deposit that you have to make for gaining access to the offered credit card limit.

The activities on this card are reported to credit bureaus, and the credit score fluctuates accordingly. However, remember that you still have to pay your credit card bills on time for the card to be of any benefit.

What is good Credit Score ? - 4 tips for good credit score

Fix Your Credit Utilization Ratio

You should keep your credit utilization ratio within 30%. If you notice that your expenses are exceeding 30% of your credit limit, your credit scores will inevitably drop. Consider increasing your credit limit in such a situation.

A higher credit limit automatically brings down your credit utilization rate, provided that your expenditure or credit balance remains constant.

You may call your credit card issuing company and request for an increase in the credit limit or make an application online.

You could also get another credit card for the same purpose. However, increasing your credit limit isn't a piece of cake, and you might have to go through a rough road.

Once you successfully manage to improve your credit limit, spend carefully - your expenses must not increase.

This will balance out your credit utilization rate, and a low utilization rate boosts the credit score.
Don’t Apply for Too Many Credits Simultaneously

Hard inquiries deduct points from your credit score. If you apply for too many lines of credit at a time, each will amount to a hard inquiry.

These hard inquiries remain on your credit report for quite some time. Many hard inquiries at a time will not only reduce your credit score but will also make you seem quite desperate for cash.

Hence, lenders will not be able to trust you. So whenever you apply for credit cards, spread the applications apart over a long period.