Does a high credit utilisation ratio hurt your credit score? Here’s how to increase your limit

Do you usually use more than 30% of your credit card limit every month or in most months? If so, it can harm your credit score. If you are wondering how, it is due to the higher credit utilisation ratio (CUR).

In this article, we will understand what the credit utilisation ratio is, how a higher ratio can negatively impact your credit score, how to increase your credit limit, and how to lower the ratio to improve your credit score.

What is the credit utilisation ratio?

The credit utilisation ratio refers to the percentage of the credit limit used out of the total credit limit available. For example, suppose you have a credit card with a credit limit of Rs. 1 lakh. Suppose you spend Rs. 40,000 on your credit card in a monthly billing cycle. In this case, your credit utilisation ratio will be 40% as you have used 40% of the total credit limit available.

The credit utilisation ratio is one of the parameters used in calculating the credit score. A credit utilisation ratio of 30% or lower is considered good and contributes towards increasing the credit score. On the other hand, a credit utilisation of over 30% is considered high and contributes towards lowering your credit score.

Now that you understand the concept of credit utilisation ratio, check your ratio. If it exceeds 30%, take steps to reduce it. It can be done in two ways:

1. Reduce your expenses on the credit card, or
2. Get an increase in the credit limit on the credit card, and maintain the same expenses

How to lower the CUR and improve the credit score?

In the early section, we mentioned two ways of reducing the credit utilisation ratio to bring it down to 30% or lower. Reducing expenses on the credit card is something that most people may not like. Alternatively, you can ask the bank to increase the credit limit on your credit card.

Here is how a higher credit limit can reduce the credit utilisation ratio. Let us continue with the earlier example. Suppose you have a credit card with a credit limit of Rs. 1 lakh, and you are spending Rs. 40,000 with the card, resulting in a credit utilisation ratio of 40%.

The bank provides you with a credit limit enhancement (CLE) offer to increase your credit limit to Rs. 1,60,000. You accept the CLE. With a higher credit limit of Rs. 1.6 lakhs, you continue spending Rs. 40,000 with the credit card. Now, your credit utilisation ratio will fall to 25% from the earlier 40%. A credit utilisation ratio of less than 30% will contribute towards increasing your credit score.

How to increase the credit limit?

Banks regularly monitor the credit card usage of their cardholders. Based on individual usage and other factors, banks periodically roll out credit limit enhancement offers. When the cardholder accepts the CLE and maintains the same monthly expenses, the credit utilisation ratio falls.

Banks communicate the CLE offers through various channels, including email, SMS, WhatsApp, and internet banking. Credit cardholders can check their CLE offers by logging on to the bank’s internet banking or the mobile App. Proceed to the credit card section, where you will find the credit limit enhancement offer, if any. Once you accept the offer, the credit limit will be enhanced immediately.

What if the bank is not sending you a credit limit enhancement offer?

Sometimes you may be waiting for a CLE offer from the bank, and the bank is not offering it. In such a scenario, if your income has increased recently, you may share the latest salary slips/income documents with the bank.

Based on the higher income, the bank is likely to offer you a credit limit enhancement. Once you accept the CLE, your credit limit will increase immediately. With a higher credit limit, when you maintain the same monthly expenses on the credit card, your credit utilisation ratio will fall. A credit utilisation ratio of 30% or less will contribute towards improving your credit score.

Take a credit card from another bank

Sometimes, even after sharing the higher income documents with the bank, the bank may not offer a credit limit enhancement. In such a scenario, you can approach another bank and apply for a new credit card. With an additional credit card, the combined credit limit on the two cards will increase. You can distribute spends on the two cards and reduce your credit utilisation ratio, which can then contribute towards improving your credit score.

Take a secured credit card

What are your options if you are unable to get another credit card based on your income eligibility criteria? These days, many banks offer secured credit cards against the security of a fixed deposit. You can go for a secured credit card. The credit limit provided usually ranges between 75% and 100% of the fixed deposit amount.

The bank marks a lien on the fixed deposit. As a result, you cannot withdraw the fixed deposit amount, partially or fully, till the credit card is active. On maturity, the fixed deposit is automatically renewed for the same tenure at the prevailing interest rate on the renewal date.

Based on the credit limit you need and the bank’s credit policy, you can determine the fixed deposit amount and accordingly apply for a secured credit card.

Benefits of credit limit enhancement

If you have a credit utilisation ratio of more than 30%, one of the biggest benefits of credit limit enhancement (CLE) is that it reduces the ratio, provided the monthly expenses on the card stay the same. Further, we have already seen how a credit utilisation ratio of 30% or lower contributes towards improving the credit score.

Some of the other benefits of a credit limit enhancement include the following:

1. Higher purchasing power: A higher credit limit provides higher purchasing power for big-ticket items. For example, suppose you have a credit limit of Rs. 50,000, and you want to buy a laptop worth Rs. 75,000. You will not be able to proceed. However, suppose the bank gives you a CLE of Rs. 1 lakh. With a higher credit limit, you can now proceed with your laptop purchase.
2. Higher reward points: With a higher credit limit, you can increase the monthly need-based spends on the credit card. With higher spends, you will earn a higher number of reward points, reach milestone spends that unlock more rewards, etc.
3. Annual fee waiver: Many credit cards waive the annual renewal fee when a specified annual spend milestone is achieved in the previous year. With a higher credit limit, it becomes easy to reach the annual milestone spend for the annual fee waiver.
4. Financial emergency backup: A higher credit limit can act as a backup during a financial emergency. However, it’s best to have a separate emergency fund instead of relying on your credit card for it.

CLE can lower the CUR and contribute to improving the credit score

After timely payment of the monthly outstanding, a credit utilisation ratio of 30% or lower has the second-highest weightage in the factors influencing the credit score. Hence, maintaining a credit utilisation ratio of 30% or lower is important. If your credit utilisation ratio is more than 30%, check if the bank has offered any CLE. If so, you must accept it so that with the same monthly spends, you can lower your credit utilisation ratio.

If the bank has not offered a CLE, request it by submitting your latest income documents. If the bank is not offering a CLE, approach another bank for a new credit card or apply for a secured credit card. A new credit card will increase your overall credit limit. Shifting some spends to the other credit card will help lower the utilisation ratio. Thus, a lower utilisation ratio will contribute towards improving your credit score.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.

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