Credit Utilization Ratio – Definition, Formula | How to reduce it?

Credit Utilization ratio definition formula how to reduce card utilization rate
Credit utilization ratio, as the name suggests – it is how much credit you are utilizing relative to total available credit limit on all your credit cards. It is usually described in percentage.

Credit Utilization Ratio – Definition, Formula – Credit utilization ratio is one of the important factors that affect directly your credit score. If you want to know how to improve credit score, then you must know about credit utilization ratio as it impacts your credit score significantly. This article gives answer to the following questions –

  • What is Credit Utilization Ratio?
  • How to Calculate Credit utilization ratio?
  • How to reduce utilization rate to improve credit score?

Credit utilization, as the name suggests – it is how much credit you are utilizing relative to total available credit limit on all your credit cards.

What is Credit Utilization Ratio?

Credit Utilization ratio, also known as credit utilization rate is the amount of revolving credit you are currently using divided by available total revolving credit limit. The credit utilization ratio depends on how much you spend on your credit card. Credit utilization ratio is generally expressed in percentage.

Calculation of Credit Utilization Ratio – CUR formula

you can calculate credit utilization using following formula :

[Credit utilization ratio = (Total Debt/Total Credit Limit)*100]

For example,

Suppose your total credit card limit is 1,00,000 rupees. You have an outstanding balance of Rs. 30,000/- (that you have spent).

According to CUR formula,

Credit Utilization Ratio Formula - How to Calculate
Credit Utilization Ratio Formula

Credit utilization ratio = (30000/100000)*100 = 30%, Your credit utilization rate is 30 percent.  It means you have utilized 30 percent of the total available credit limit.

In case of two cards, CUR can be calculated for total debt on your credit cards and is known as per-card ratio.

What is the ideal credit utilization ratio?

The ideal CUR depends on credit rating agencies, they may have a different criteria to determine the ideal credit utilization ratio. However, it is commonly recommended to maintain the CUR below 30 percent.

What is ideal current utilization ratio for credit score
What is ideal current utilization ratio?

A lower credit utilization ratio below 30 percent indicates that you are having good financial habits because you are not overspending. However, a higher ratio implies that you are facing financial difficulties due to overspending on your credit card which may further hurt your credit score.

How to reduce credit utilization ratio?

Now, it is more important to know how you can reduce the CUR below 30 percent to improve credit score. Here are some smart tips using which you can achieve it.

Use Credit Card within the Limit

Don’t use your credit card to its fullest limit. Keep in mind 30-70 rule and try to maintain your credit utilization percentage under 30 percent.

When you cross the CUR above 30 percent limit, make the repayment before bill generation date to avoid reporting of higher CUR to credit rating agencies.

Do not use credit card until you repay the outstanding balance of your card.

Make repayment in full

Make sure that you repay the outstanding balance or credit card bill in full every month. If you keep the outstanding bill due it may lead to higher credit utilization ratio thereby hurting your credit score.

Repayment of full amount of debt every month will help you to achieve lower credit utilization ratio below 30 percent.

Increase Credit Limit

Seeing your good credit card habits, banks or financial institution may offer your higher credit card limit. Grab this opportunity to get higher credit card limit. Increased credit limit helps you to get a low credit utilization ratio if you don’t increase your credit card spends.

You may also approach your bank to increase credit card limit.

Apply for new credit card

If you apply for a new credit card and get approval. You get an additional credit card which can be used in case in case you surpass 30 percent limit of credit utilization ratio on your primary card.

But having too many cards can negatively impact your score. So before applying, always assess your financial ability.

Pay Credit Card Dues Twice in a Month

Usually, we pay the credit card outstanding bill once in a month on due date. But if you really want to reduce the credit utilization ratio you can consider making repayment twice in a month, which helps you to bring down the outstanding balance below 30 percent threshold.

Frequently Asked Questions (FAQs) on Credit Utilization Ratio

Does credit utilization ratio matter even if I pay in full every month?

Yes. Even if you pay off your credit card due in full, it doesn’t mean 0 percent credit utilization. It is not necessary that credit card issuers report only when your bill is 0. Most of the institution report to credit rating agencies on bill generation date.

If you pay the outstanding balance before bill generation date, then it is likely that it will not get reported to credit agencies.

What is a good credit utilization ratio?

Ideally, it is 30 percent. But try to keep it as low as possible as it directly impact your credit score.

How long does credit utilization ratio affect credit score?

A high credit utilization ratio for one month does not hurt credit score for long term. Credit score get improved, once a new lower outstanding balance is reported.

How do I keep credit utilization ratio at the lowest?

You can follow some simple ways we discussed above to reduce the credit utilization ratio – use credit card within 30 percent of the available limit, increase credit card limit, apply for new credit card, pay credit card bill twice in a month.

I have used 75 percent of the available limit on credit card, will it affect my credit score?

Yes, it reflects a high credit utilization ratio which is bad for your credit score. To lower it, you can make repayment before bill due date.


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