Credit cards have emerged as a widely used financial tool in India, providing consumers with a convenient way to manage their finances and make purchases. However, it’s crucial to be aware of how credit card usage can affect your credit utilization ratio, which is crucial in determining your credit score. We’ll delve into how credit cards impact your credit utilization ratio and provide some tips for managing it.
The credit utilization ratio is a measure of how much credit you’re utilizing compared to how much you have available. It’s calculated by dividing your credit card balance by your credit limit. Suppose your credit card has a limit of Rs. 50,000, and you have a balance of Rs. 10,000, then your credit utilization ratio would be 20%. In India, your credit utilization ratio is essential in determining your credit score and accounts for approximately 30% of it. It’s usually better to maintain a low credit utilization ratio because it suggests that you’re responsibly utilizing your credit and avoiding overextending yourself.
Credit cards can significantly impact your credit utilization ratio in several ways. Firstly, the more you use your credit card, the higher your credit utilization ratio will be. Suppose you spend Rs. 40,000 on a credit limit of Rs. 50,000, your credit utilization ratio would be 80%, which is significantly high. It’s advisable to use your credit card responsibly and keep your balance low to maintain a lower credit utilization ratio.
Secondly, applying for new credit cards can also impact your credit utilization ratio. Every time you apply for a credit card, the credit card company performs a hard inquiry on your credit report. These inquiries can temporarily lower your credit score, and if you’re approved for the new credit card, it will increase your available credit. However, if you’re not careful, this increased credit limit can lead to a higher credit utilization ratio.
Thirdly, closing a credit card can also impact your credit utilization ratio. If you have multiple credit cards and close one of them, it will decrease your available credit. This can cause your credit utilization ratio to increase, even if you’re not using your remaining credit cards any differently.
To manage your credit utilization ratio effectively, it’s crucial to keep your balances low. The most effective way to do this is to aim to use no more than 30% of your available credit. Suppose your credit limit is Rs. 50,000, in that case, it is advisable to ensure that your balance remains under Rs. 15,000. Making payments on time is also essential for maintaining a good credit score in India. Late payments can have a severe impact on your credit utilization ratio, particularly if you’re carrying a high balance. Consider setting up automatic payments or reminders to avoid late payments.
Lastly, it’s advisable not to close old credit cards. If you have multiple credit cards, it can be tempting to close some of them. However, closing an old credit card can reduce your available credit, which, in turn, can increase your credit utilization ratio. If you have an old credit card that you’re not using, consider leaving it open but not using it instead.
Conclusion
Credit cards can significantly impact your credit utilization ratio, which is crucial in determining your credit score in India. By understanding how credit cards can affect your credit utilization ratio and following the tips outlined in this article, you can manage your credit card usage responsibly and maintain a good credit score. Remember to keep your balances low, make payments on time, avoid opening too many credit cards, and monitor your credit utilization ratio regularly.
