How Credit Utilization Affects Your CIBIL Score

Maintaining a healthy CIBIL score is critical for accessing loans and credit cards with favorable terms. A key factor influencing this score is credit utilization—a metric that lenders carefully evaluate. This article delves into credit utilization, its impact on your CIBIL score, and tips to manage it effectively.

What is Credit Utilization?

Credit utilization is the percentage of your total available credit that you are currently using. For example, if your credit card limit is ₹1,00,000 and your balance is ₹40,000, your credit utilization ratio is 40%.

This ratio is a strong indicator of your financial discipline. A lower ratio suggests prudent credit management, while a high ratio could signal financial strain, which may negatively affect your CIBIL score.

Why Credit Utilization Matters for Your CIBIL Score

Your CIBIL score is influenced by several factors, and credit utilization contributes significantly—up to 30% of your score. Here’s how it impacts your creditworthiness:

1. High Credit Utilization Lowers Your CIBIL Score

If you consistently use a significant portion of your credit limit, it indicates a dependency on credit. Lenders view this as a red flag, reducing your CIBIL score.

2. Low Credit Utilization Boosts Your Creditworthiness

Keeping your credit utilization below 30% demonstrates financial responsibility. This positively impacts your CIBIL score, improving your chances of loan approval.

3. Sudden Spikes Can Cause Temporary Drops

A sudden increase in credit utilization—such as large purchases—can temporarily lower your score, even if you intend to repay the balance quickly.

How to Calculate Credit Utilization

Calculating credit utilization is simple. Use this formula:

Credit Utilization Ratio = (Total Credit Used ÷ Total Credit Limit) × 100

For instance, if you have three credit cards with a combined limit of ₹2,00,000 and outstanding balances totaling ₹50,000, your credit utilization ratio would be:

(50,000 ÷ 2,00,000) × 100 = 25%

Tips to Maintain a Healthy Credit Utilization Ratio

1. Spread Your Expenses Across Multiple Credit Cards

Instead of maxing out a single card, distribute your expenses to keep the utilization on each card below 30%.

2. Request a Credit Limit Increase

If you’re close to your credit limit, ask your issuer for a limit increase. This can lower your credit utilization without reducing spending.

3. Make Multiple Payments in a Billing Cycle

Pay your credit card balance more than once a month to reduce the reported balance and maintain a low utilization ratio.

4. Avoid Closing Old Credit Cards

Closing a card reduces your total available credit, which can increase your credit utilization ratio and negatively impact your score.

5. Monitor Your Credit Reports Regularly

Regularly review your credit report to ensure accurate reporting of your credit utilization and dispute any errors.

Credit Utilization and Loan Approvals

Lenders use your credit utilization as a key parameter to assess your repayment capacity. High utilization may lead to:

Higher interest rates.
Loan rejections.
Lower credit limits on future approvals.

On the other hand, a low credit utilization ratio can:

Improve loan eligibility.
Help you secure favorable terms, including lower interest rates.

Conclusion

Managing your credit utilization effectively is essential for maintaining a healthy CIBIL score. By keeping your utilization ratio low and practicing financial discipline, you can enhance your creditworthiness, increasing your chances of securing loans and credit cards at favorable terms.

Stay vigilant, track your spending, and adopt smart strategies to keep your credit utilization in check.