Credit card: How does your credit utilisation ratio impact loan approval chances? | Mint

The credit utilisation ratio on your credit card is an important financial metric that lenders consider while approving a loan. If your credit utilisation ratio is above normal limits, the chances of you getting a loan comes down significantly. Here is a primer on credit utilisation ratio, how it works and how to keep it at desired levels to get loans.

What is the credit utilisation ratio and how does it work?

Credit utilisation ratio or CUR is a percentage of the credit that you are using now compared to the total credit that is available to you. It is calculated by dividing the amount of revolving credit that you currently utilise by the total available credit. For instance, if your total available credit is ₹2 lakh and you utilise ₹50000, then your CUR will be 25%.

Lenders rely on CUR to assess how effectively you manage your existing debt. CUR is a measure of your creditworthiness and financial responsibility. A higher CUR is an indicator of financial stress and will adversely impact your loan approval prospects as lenders will consider you as a high-risk borrower.

What is the ideal CUR and what is its impact on credit score?

It is advisable to keep your CUR low. Most lenders consider a CUR of 30% and lower as ideal for loan disbursements. “A good credit utilisation ratio is typically considered below 30% of your available credit. For instance, if you have a credit card with a credit limit of ₹20000, keep your balance below ₹6000 (30% of ₹20000),” according to Kotak Mahindra Bank.

“High credit card balances relative to your credit limits can lower your credit score. A lower CUR indicates responsible credit management and positively affects your creditworthiness,” according to ICICI Bank.

CUR also affects your credit score. If you have a high CUR, it means that you are taking on too much debt and as a result your credit score will be lower. CUR accounts for about 30% of your overall credit score calculation.

How can CUR be reduced?

While high CUR is a clear signal of financial strain, there are several ways by which you can reduce it. Here are some of the steps that you have to take to reduce CUR.

Lower spending

Keeping your spending at manageable levels is one of the best ways to reduce CUR. You should cut down unnecessary expenses on your credit card and reduce monthly bills. Once you do that, it will automatically enhance your CUR. Typically, it is the large spendings made using your credit card that impacts your CUR the most. So, it is advisable to fund them using other modes such as debit cards or by availing short-term loans at lower interest rates.

Increase your credit limit

A credit card always comes with a specified credit limit. Though lenders increase the credit limit on a regular basis depending on your spending patterns, you have to keep checking the available limit. If your credit limit does not reflect your current income or spending levels, you should request the card issuing bank to increase the limit. Enhancing your credit limit is one of the easiest ways to bring your CUR down to acceptable levels.

Clear outstanding dues

If you have outstanding dues on your credit card, it will have an adverse impact on your CUR. If you have unpaid dues from the previous billing cycle, it is better to clear them before making any new purchases on your credit card. Clearing outstanding balances will also free up the credit limit on your credit card.

What is the impact of CUR on multiple credit cards?

If you have multiple credit cards, you have to keep the CUR of each of them at desirable levels. But if you are not using them often, it is better to keep them active by paying the required fee as it will increase your CUR.

“Closing old credit accounts can reduce your total credit limit and potentially raise your CUR. It’s often wise to keep old accounts open, even if they are not actively used,” according to ICICI Bank. “The unused and idle limit on your credit card helps keep your credit utilisation ratio lower and increases your credit score,” according to Kotak Mahindra Bank.

“If you close anold credit card, it also cut shorts the life of your credit history which makes your credit score dip. If the credit card doesn’t attract any annual fees and related charges, it is recommended to keep it running,” the bank said.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.