Nowadays, nearly every employed person has a credit card. However, these cards can only be financially beneficial if used properly.
There are several key points to consider. Most importantly, if you are utilizing your credit limit, you should be aware of the following:
Are You Using Your Credit Limit? If you have a credit card, experts recommend not spending your entire credit limit or exceeding it. Doing so can disrupt your financial plans and potentially harm your credit score.
The ideal credit utilization ratio is 30%. For instance, if your credit limit is Rs. 7 lakhs, you should aim to spend at most Rs: 2.10 lakhs, 30% of Rs. 7 lakhs.
What Is the Credit Utilization Ratio? The credit utilization ratio is the percentage of the total credit available on your card that you are currently using. This is a crucial factor in determining your credit score, as it reflects how much of your credit limit you are utilizing.
You can calculate your credit utilization ratio (CUR) using the following formula: (Credit Card Balance/ Credit Card Limit X 100).
For example, if someone has a total credit card balance of Rs. 5 lakhs and a total credit limit of Rs. 10 lakhs, their CUR would be: This means that CUR is 5/10 X 100, equal to 50 percent.
A low credit utilization ratio (less than 30%) is generally considered favorable for your credit score. A lower CUR suggests that you are managing your credit responsibly, which signals to lenders that you pose a low risk, thereby increasing your credit score.
If you find it challenging to maintain an ideal credit utilization ratio, here are a few tips to help manage it:
- Pay on Time: Pay off your debt before closing the statement.
- Increase Your Credit Limit: Request your bank to raise your credit limit. A higher limit can help reduce your utilization ratio, but be cautious to keep your expenses from increasing significantly.
- Use Multiple Cards: If you have more than one credit card, spreading your spending across them can help prevent overspending on a single card.