Understanding the Importance of Credit Utilisation Ratio for Borrowers

The Significance of Credit Scores

In today's financial landscape, a credit score serves as a vital metric for lenders assessing potential borrowers. For individuals, it is essential to maintain a robust credit score. A key component in this evaluation is the Credit Utilisation Ratio (CUR), which indicates the proportion of credit being utilized relative to the total credit limit available.

What is Credit Utilisation Ratio?

The Credit Utilisation Ratio acts like a performance report, reflecting the borrower's credit management habits. Several factors can influence this ratio, including timely payments and adjustments to credit limits.

How Credit Utilisation Ratio Works

Understanding the Calculation

The CUR assesses the amount of credit used against the total credit limit. For instance, if a borrower has a total credit limit of Rs 5 lakh and currently utilizes Rs 1 lakh, the CUR would be 20%. The calculation is as follows: CUR = (Total Credit Used ÷ Total Credit Limit) × 100. Lenders often consider a CUR exceeding 30% as indicative of potential financial strain.

Factors Affecting Credit Utilisation

One significant factor that can increase the CUR is the closure of unused credit cards. For example, if a borrower closes a credit card with a Rs 2 lakh limit, their total available credit decreases to Rs 3 lakh, while their outstanding balance remains unchanged, resulting in a CUR of over 33%. Generally, a CUR below 25% is deemed acceptable.

Additionally, maintaining older credit cards can enhance your credit score, as they reflect a history of responsible repayment. Closing long-held accounts can negatively impact the calculation of your active credit age.