Since years we have been listening to the saying, that spends only that much, how much you can earn. However, over the past few years, he thought has been changing. With credit cards coming into the picture and the availability of them have made it easier for many people to spend even when they do not have that much cash on hand for that moment. Credit cards have made it easier for people to access money when in urgent need. But, there are few asterisks (*) that comes with whatever we peruse. And when it is a credit card, the credit utilization holds the biggest asterisks. Even though the card has a given limit, it is never a good practice to use all of it!
With credit cards comes the credit utilization ration. But that? And what it? Let’s understand this with an example. Suppose the credit limit of a particular card owned by someone is 1,00,000 Rs; then it is advisable to use 30% to 40% I.e. 30,000 to 40,000 Rs max. Credit utilization is basically the amount that is spent on the total credit that is available to an individual of their card. And, the credit utilization ratio is the amount used divided by the total available credit limit. Now, the next question that arises is: why to maintain the ration? When the limit available is more, then why not use more.
A credit score is an answer to that. With many criteria that have their effects on credit score, this one also plays a role. The reason behind is, more the usage, more the debt. More the debt, more it seems that the person is in need of credit. And more the need of credit shows more debt burden. So its a huge chain of logic that have been eventually considered after studying many of the cases. The irony is if you have more than one cards, and collectively if you spend, and exceeds the total limit, 40% would still be okay. So, taking the above example, if there is one more card of the same limit, 1,00,000. and if one uses, 35,000 each card, i.e. 70,000 in total then it is okay. As the total credit limit available is 2,00,000. But, using 70,000 from single card shows credit hungry behavior. Of course, this does not mean that one should keep applying for the cards and use it. Everyone should always check the amount which they would be able to repay if spent before then paying.
Credit score a tricky concept. But easy to understand. More the usage of the credit card will imply that the cash in hand is unavailable. When the credit card is given, an individual’s salary or bank account is checked if they are either salaried or self-employed respectively and only then the card is offered or approved. But many, misuse it. And hence the credit bureaus check the credit utilization ratio. What to do if the usage is more and the limit available is less? Simple, as mentioned earlier, apply for one more card. But, one should not apply for too many cards. Even that states that it is a credit hungry behavior and one is in bad need of funds. Similarly, closing the older credit cards also would impact the score as the older accounts shows the credit behavior one has over these years. And account history is also one of the factors which comprise the credit score. Also, if one does not want to apply for new cards, they can always make the payment more than once a month. When the usage seems to exceed 30%, make a payment and revive the credit limit!
The moral to all this is, anything used on average is good. May it be the credit that is available! Using 30% to 40% of the total limit available over the credit card shows a responsible behavior. And that also maintains the score!