Credit Utilization and its effect on CIBIL Score

Rate of credit utilization is the amount of every outstanding balance on your credit card denoted as a percentage of the total of your credit limits of all your credit cards. Your CIBIL score is better if your credit utilization is lower as it displays that you are utilizing only a miniscule part of your limits. It is recommended that an individual’s credit utilization rate should not exceed beyond 30%. Credit utilization represents how people utilize their credit cards and how governed an individual is while using his/her credit.

How rate of credit utilization has an effect on your CIBIL score: The credit utilization rate is a guide for creditors indicating the risks of lending. It is a signal for the creditors that the individual seeking the loan may be facing financial constraints and might be a credit risk. Individuals who tend to cross their credit limits constantly, spending all the money have the tendency of being considerable risks when it is time for repayment in comparison  to people who tend to use their credit cards  responsibly and within their credit limits.

It is a little difficult to compute in exact terms how the rate of credit utilization will affect your credit score, given the availability of different score models. However, there is a staunch correlation between the rate of credit utilization and the credit score. With the exception of people whose rate of credit utilization is at 0%, the people whose credit utilization rate have lower averages have better credit score in comparison to the people who utilize the entire limit on their credit cards. People with multiple cards and a good, long credit history are not as affected by the high rates of utilization as the people using only one card with lesser credit history.

Ways to reduce your utilization rate:

 

  • It is not enough to repay your credit card dues once at the end of the month. Issuers of the credit card can share your account details with credit rating bureaus at any time which may not necessarily be at the end of the month post you paying off the balance. There is a possibility that your balance was high at the time of sharing the data. Therefore, it is advisable to repay your credit dues more than once every month in order to maintain a low balance.
  • If you have more than once card, it is recommended to try to utilize different cards for different transactions rather than using just one card for all the transactions. This would leave you with multiple cards with low utilization rather than one card with high utilization.
  • You can try to maximize the availability of your credit limit. It will not hurt to apply for a limit increase if you have a good credit history or an increase in income. This will assist in having a low utilization rate since your limit has increased while still spending more.

 

Thus, rate of credit utilization plays an important role in your credit score.

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