Should you use your entire credit card limit?

4 MinsJuly 19, 2021

Vikram Singh frequently uses his two Credit Cards to their maximum limits but is diligent in paying off the bills on time. However, when he applied for a mortgage, he encountered unexpected delays. The issue? His credit report highlighted a high credit utilisation rate, as he was regularly using nearly the entirety of his available credit.

credit card limit

To avoid a situation like Vikram's and maintain a healthy credit report, it's crucial to understand credit utilisation and its impact on your credit score:

Understanding credit utilisation rate: This rate, often expressed as a percentage, is the ratio of your current credit usage to your total available credit. For instance, if Vikram has a combined credit limit of ₹1,00,000 on his cards, and he spends about ₹95,000 monthly, his credit utilisation rate would be 95%.

Why high utilisation is problematic: Consider being the bank manager reviewing Vikram's loan application. If his monthly home loan payment is ₹50,000, and his income is ₹1,50,000, spending ₹95,000 on Credit Cards leaves only ₹55,000 for other expenses. This makes Vikram a high credit risk due to his extensive use of available credit, suggesting potential difficulty in managing additional EMIs.

Ideal credit utilisation rate: Financial experts generally advise keeping your credit utilisation rate below 30%. A lower rate is seen as a sign of sound financial management, indicating a lower likelihood of irresponsible spending.

Impact on credit score: Credit scores are calculated using various factors, including Credit Card utilisation rates. Generally, a lower rate correlates with a higher credit score.

[Also Read: 7 factors that pull down your credit score]

Improving credit utilisation rate: Vikram has several options to better his rate, such as:

  • Reduce card expenses, limiting them to essential payments.
  • Acquire an additional Credit Card to distribute expenses, being cautious not to increase total spending.
  • Request a credit limit increase from his card issuers, being mindful not to escalate his spending.
  • If reducing card expenses isn't feasible, he should aim to pay off his card dues more frequently, such as bi-monthly, to lower his monthly utilisation ratio.

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