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Dejargoned: Open credit card utilisation rate

This rate is an indication of how much of the credit that's available to you is used

Using a credit card can be tricky. Use it well and your credit score improves; misuse it and your score goes down. Even if you don’t have a credit history, a bank may issue a credit card to you on the basis of your salary and banking transactions. Regular usage of a credit card builds your credit history. But apart from timely payment of dues, credit bureaus also see how you utilise your available credit limit—in other words, your open credit card utilisation rate.

WHAT IS IT?

This rate is an indication of how much of the credit that’s available to you is used. For this purpose, the total open credit card balance is divided by the total open credit card limit. For instance, if you have three credit cards, with total credit limit of 6 lakh, and you use only 1 lakh of this, then 5 lakh is unutilised. In this case, your utilisation rate would be (1/6)*100, which is 17%. This indicates low usage.

If your utilisation percentage is on the higher side (above 80% or 90%), the lower is your credit score likely to be.

WHAT SHOULD YOU DO?

An individual’s open credit card utilisation rate can be read to gauge her creditworthiness.

If you regularly use up the entire or most of the credit limit available to you—be it through one card or more—it shows that you are credit hungry. Lenders tend to look at such prospective borrowers as risky customers, whose risk of defaulting is higher. The reasoning is that if such a credit card holder lands into financial difficulties, she would find it difficult to manage her finances.

Try not to use up your credit limit on a regular basis. Ideally, keep the usage at 30-40% of the limit.

However, if you had got the credit card long back and its credit limit has not increased with your income level, you may be using up the entire credit.

In such a case, give your current income details to the card-issuing company and ask either for the limit to be increased, or for a new card. You can even go to another company for a new card.

While you may not need the extra credit limit, it will improve your open credit card utilisation rate. For instance, if someone uses 90,000 or more out of an available 1 lakh credit limit, her utilisation rate is more than 90%. She should either get her limit enhanced, or apply for another card with at least 1 lakh credit limit. This will increase her total credit limit to 2 lakh, and bring down the open credit utilisation rate to 45%. At the same time, not using your credit limit at all, or using too little, doesn’t help your credit score either.

So, if you hold credit cards, make sure you use them regularly and judiciously. And be sure to pay your dues on time, however small the amount may be, because a delay or a default, or even paying only the minimum dues, will bring down your credit score.

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