Creditvidya.com | Last Updated: June 13, 2016 10:38 (IST) | NDTV Profit
Credit utilisation is the ratio between the credit card spending and the sanctioned limit for the card. This is calculated cumulatively as well as individually which means that it is calculated for each card that one might have and also for all the cards put together. Thus, the overall spending on your card versus the total sanctioned limit is the cumulative credit utilisation.
Why is this ratio important? This ratio is important because after the repayment history this is the biggest contributor that makes or breaks the CIBIL score of an individual.
How does it make a difference if the credit utilisation is high or low? High credit utilisation is indicative of being credit hungry and also poor debt management, both indicate risky borrowing behaviour which makes the CIBIL score low. Then does it mean that zero credit utilisation is good?
No. While a high credit utilisation ratio is definitely not good for the CIBIL rating a nil one is also not good either.
Smart ways to manage credit utilisation ratio
Reduce expenditure: Well, to be honest it is not the smartest way but definitely the most obvious and the simplest way. Yet this is something that might not be the easiest thing to do. If expenditure on credit card is high because of unplanned and impulsive buying then yes you could try to reduce the spending.
Get a bigger credit limit: Either one could decrease the numerator (spending) or increase the denominator (limit) to reduce the ratio. Getting a bigger limit is one of the options. Often for cards that were issued a few years back, card holders forget to revise the sanctioned credit limit even though they are eligible for it. Thus one could check with the card company and find out if they are eligible for a higher limit. If the eligibility allows then one could get a bigger limit sanctioned for their existing card.
Opt for an additional card: If a higher limit is not possible due to the rules by the credit card issuer or you already having a high limit, then one could explore the option of getting an additional card. An additional card will raise the overall available credit limit thus making it possible for you to control a high credit utilisation ratio. However this option will work only if the expenditure is spread smartly over all cards and if one easily manages paying the dues on all cards.
Distribute expenditure smartly between cards: An additional card will not work if the expenditure is not distributed judiciously over all cards. It also makes sense to time the spending depending on the billing cycle and due date and charge it to the appropriate card accordingly. If the credit utilisation ratio is low overall but is too high for one card then also it is not a good indicator for the credit score.
Try paying mid-cycle once a while: If in one billing cycle due to some festivities or unforeseen circumstances there is very high spending on the credit card, then one could consider paying before the actual due date to keep the credit utilisation in check. Paying mid-cycle some amount will ensure that the ratio does not become too high.
Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.
Source : http://goo.gl/Cxof7c