Credit utilization is one of the key factors that determine your CIBIL Score. But, what is the credit utilization ratio? It is the total amount of credit you use against the total credit limit sanctioned to you. A higher credit utilization ratio has a negative impact on your CIBIL Score. It also indicates to a prospective lender that you may have too much debt.
A lender would thus perceive you as a risky customer. You are more likely to fall behind on your repayment schedule. This is because of your existing credit repayment commitments. High credit utilization works against you. Making timely repayments is not enough. Credit health experts recommend a credit utilization ratio under 30%. This keeps your CIBIL Score high. If your CIBIL Score is low because of a high credit utilization ratio, here are a few things you can do to lower it.
Ask for a Higher Credit Limit
This is the easiest way to push up your credit utilization. If you pay your credit card bills regularly, the card issuer may raise your credit limit. But this may be a bit of a slippery slope. It may lead to higher credit usage, too. You may decide to raise your credit limit to improve your credit utilization ratio. But resist the temptation to use up to the upper limit.
Reduce Your Credit Card Balances
Reduce the outstanding balance on your card. Make payments larger than the minimum amount each month. Consider making two or more payments within the same billing cycle. Keep outstanding balances low. In fact, try to pay the entire outstanding amount on your card within the billing cycle.
Refinance credit Cards With a Personal Loan
You may use several credit cards. Your credit utilization ratio is calculated in two parts then. First, there is a calculation of credit utilization on each card. Then, there is a calculation of the total credit balance compared to the total credit limit. If your credit utilization is high on both counts, your CIBIL Score will come down. In such cases, it is better to turn credit card debt into one personal loan. Try to get a lower rate of interest. But keep your credit cards open even after refinancing the debt.
Apply for a New Credit Card
Applying for a new credit card will push up your credit utilization. But it will not improve your CIBIL Score. When you make a new application, your CIBIL Score will take a minor hit. This request for credit will show as a hard inquiry on your CIBIL report. Besides, a large number of credit cards may turn out to be a vicious circle. It can lead you into a debt trap.
Also Read: Easy Ways to Improve your CIBIL Score
Credit utilization is all about exercising control on your credit use. Low credit utilization keeps your financial health in order. A high CIBIL Score is an indicator of good financial health. It enhances your chances of getting access to timely credit. You can get competitive rates of interest from a reputable lender.