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.


Don’t undermine your old credit card for a good CIBIL score

Building a good CIBIL score requires diligence and patience and is not something that can be achieved overnight. Even if you are promised quick-fix methods to build your score, beware – they are the ones most likely to backfire. Over time however, you can work towards improving your credit score, by focusing on your credit history.

Credit cards are one such product that if used judiciously, can help you not only build but also enhance credit score over a period of time.

What is a CIBIL score?

It is a credit score generated by CIBIL, India’s oldest credit bureau. Owing to the first mover advantage, credit scores are very often referred to as CIBIL scores colloquially.

The first step

Your immediate plan of action should include requesting for a copy of your credit report, so that you know where you stand, and where you want to be. Check the report for errors and if you do spot any, have them rectified by contacting the concerned credit bureau. Keep a keen eye out for any payment-related inaccuracies such as delayed or skipped payments.

How will your old credit card help?

If you have been using a credit card for a fairly long period of time, don’t discontinue the card. Making timely payments on cards can generally help improve your score, as it shows a lender that you are able to use credit responsibly. Of course, this only works when you have no delayed or skipped payments, so be very careful as to how you utilise your credit cards. Someone with no credit card usage on their records at all is more likely to be perceived as a higher risk as compared to someone with responsible usage patterns.

Further, you need to use the card to continuously increase credit score, but make sure you don’t max the credit limit on your card. A good rule of thumb is to stay well within the amount assigned to you, the ideal being up to 30% of usage. Consider this: use as much as you can comfortably repay when the bill comes in. If you find it tricky to keep tabs, use your credit card as a debit card – remember that the money in your savings account will go towards card bill payment. In the meantime, rack up reward points on your card that you can then redeem at a later date. This will help boost your credit score, and at the same time you would have stayed well within your means. Credit cards are ultimately not free – while they do offer you the convenience and ease of use, never forget that the dues have to be paid, as it is nothing but a loan.

Also, it is likely that an older credit card has over time been assigned increased credit limits. If you abruptly close your card, the credit utilisation ratio on your remaining cards will go up, with the now reduced combined limit across cards. This can drastically affect your score, as it works as a red flag to lenders. If you really do need to close out an account, consider closing a newer one or maybe one with annual fees instead. You could also try to curb your spending, but retain the old card instead.

The length of credit history is an important parameter when it comes to credit reports. Hence, a card with some vintage, or a ‘good’ old card can go a long way in boosting your score. The older your accounts, the more responsible you seem to a lender and you are rewarded accordingly.

The bottom line

Ultimately, the decision of whether to continue with an old card account or not is entirely your decision. But do keep in mind that undermining such card accounts can be more damaging, and it might just be worth your while to keep them live.


What is a CIBIL score and how to get it for free?

A Credit Information Report (CIR) offers an individual a numeric summary of their credit history. It plays a major role should an individual want to apply for a loan, or a credit card, as all banks and financial institutions run a CIR as part of their loan approval process. It helps lenders to evaluate the potential financial risk prior to sanctioning funds to an individual, and thereby mitigating losses. Not only does a CIR help the financial institution manage their business, but it also helps the individual secure a loan or credit card sooner.

What is a CIBIL score?

A credit score constitutes a part of the CIR. Basis the financial information provided by lenders to Credit Information Companies (CIC), or Credit Bureaus, a score is determined. This score, typically based on a scale of between 300 and 900 points, is what is taken into account by a lender prior to offering credit. With CIBIL for example, a score of 750+ points is considered to be good. For a first time borrower with no previous credit history, a score of -1 is displayed. Different CICs, however, may have different scoring parameters.

While calculating the score, a number of parameters are taken into consideration, including information such as the number and type of previous loan accounts (for example, housing loan, auto loan, credit cards), repayment track record, outstanding debt and the duration of the individual’s credit history.

At times, demographic data such as the individual’s place of residence etc. are factored into the credit score. This is a practice followed by some of the newer credit bureaus, when assigning a score to an individual with no previous credit history.

What is the importance of a CIBIL score?

The credit score indicates creditworthiness of an individual. At the time of applying for credit, a good score helps in availing of a loan or a credit card quicker. It may also determine the rate at which the borrower may choose to lend, and the amount and duration of the loan.

What affects the credit score?

Delinquencies or not repaying existing loans on time can seriously impact an individual’s credit score negatively. At the other end of the spectrum, having no loans or unused credit cards may also affect your score, as this provides no past repayment track record for a borrower to assess your creditworthiness.

How to increase credit score?

Diligence with regards to payment can have a positive impact on your credit score. Ensuring timely payments on existing borrowings, and in full, make for a good score. Having secured loans such as home or auto loans also help boost your score.

It may also be prudent to keep track of your CIR, as any erroneous entry in the same may hamper your score. For example, say your credit report shows a default on a credit card payment. It is likely that the reason for delay was owing to a dispute with the concerned card company, and payment was made in full once the query was sorted. However, in the interim should this have been reported to the credit bureau as a delayed payment, it may have negatively impacted your credit score. Should you find any discrepancies, it may be a good idea to have them rectified by contacting the concerned CIC.

How to check your credit score?

There are four CICs in India today, viz. CIBIL, Equifax, Experian and High Mark.

Currently, none of them offer free CIRs. What you as an individual can do is, log on to the concerned CIC’s website and choose to purchase your CIR for a nominal fee. In addition, the CICs require some basic information in addition to an online request form, including identity proof and address proof of the individual. Making it convenient are various payment options, and the promise to deliver your CIR within a reasonable turn-around-time. however does offer the option of availing of a free credit score from Equifax, on registration on the website.

Tracking your credit history has never been easier!