What is Credit Utilization Ratio? Know how it affects your credit score
The credit utilization ratio has a direct impact on your credit score. If your credit utilization ratio is high, then your credit score will be negatively affected. On the other hand, if the credit utilization ratio is low, then there is a positive effect on the credit score.
If you use a credit card and do not know about the credit utilization ratio, then this news can prove to be beneficial for you. In fact, many people believe that the credit limit increases quickly after using the limit given on the credit card, but this is completely wrong. It is up to the bank to increase or decrease the credit limit, which decides on the basis of other terms and conditions including your income and credit score.
On the other hand, if the credit score is bad then loans and credit cards are not easily available. Banks give expensive loans to a person with a bad credit score and vice versa, banks offer easy and low-interest rates to those who have a good credit score.
The amount you spend within a month from your total credit card limit is called the credit utilization ratio. For example, if your credit card limit is Rs 1 lakh and spending Rs 30,000 in a month and your credit utilization ratio is 30%.
If you have 3 credit cards, your credit utilization ratio is calculated by adding the total limit of all three cards. For easy understanding, let's assume that you have 3 credit cards and the limit of all three is Rs 1 lakh each and you have spent 30 thousand rupees on your credit card in a month. In this case, your credit utilization ratio will be 10%.
The credit utilization ratio has a direct impact on the credit score. A credit utilization ratio of up to 30% is considered the best. And more than 30% and less than 70% are considered normal. In addition, a bad credit utilization ratio of more than 70% is considered the worst.