What is Utilization Ratio? Credit card utilization ratio is the amount of credit you're using compared to the total credit limit available on your cards.
How it's calculated? Divide your total credit card balances by the total credit limits across all your cards.
For example, if you have ₹20,000 in balances and a total credit limit of ₹1,00,000, your utilization ratio is 20%.
Why it matters? Lenders use this ratio to gauge how responsibly you manage your credit. A lower ratio suggests that you're not maxing out your cards, which indicates good financial health.
Impact on credit score - Maintaining a low utilization ratio, ideally below 30%, is crucial for a good credit score. Higher ratios can indicate financial stress and may lower your score.
Best practices -To improve or maintain a good credit score, try to keep your utilization ratio low.
Paying off balances in full each month, avoiding unnecessary spending, and keeping credit card balances low relative to your credit limits are effective strategies.
Monitoring and managing - Regularly check your credit card balances and credit limits to ensure your utilization ratio stays within a healthy range.
If needed, consider requesting credit limit increases or paying down balances to improve your ratio.