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Exhausting credit card limit? This could affect your credit score – here’s how
A high credit utilisation ratio suggests that you are using a significant portion of your available credit, which may indicate financial strain or a higher likelihood of defaulting on payments.
Credit utilisation refers to the ratio of your credit card balances to your credit limits. It plays a significant role in credit score calculation, particularly in the FICO scoring model, which is commonly used by lenders.
While CIBIL doesn’t reveal the exact methodology which it uses to evaluate credit scores, credit utilisation ratio is still a key factor in determining your CIBIL score, which is quite similar to other credit scoring models.
Impact on credit score
Lenders use credit utilisation to assess your level of risk as a borrower. A high credit utilisation ratio suggests that you’re using a significant portion of your available credit, which may indicate financial strain or a higher likelihood of defaulting on payments.
Conversely, a low credit utilisation ratio indicates responsible credit management and may positively impact your credit score.
To maintain a healthy credit score, it’s generally recommended to keep your credit utilisation ratio below 30 percent.
This means using no more than 30 percent of your available credit. However, an even lower utilsation ratio, ideally below 10 percent, can further improve your credit score.
It’s essential to monitor your credit utilisation regularly and strive to keep it low, as it can have a significant impact on your overall creditworthiness and ability to qualify for favourable loan terms and interest rates.
Frequently Asked Questions:
What is the impact of low credit utilisation ratio?
A low credit utilisation ratio indicates responsible credit management and may positively impact your credit score.
What is the ideal credit utilisation ratio?
It’s usually recommended to keep your credit utilisation ratio below 30 percent.
Do late payments affect your CIBIL score adversely?
They can have significant effect on your score significantly since the score is a measure of creditworthiness.
What is the long-term solution for poor credit score?
While it may not be an immediate solution, working to improve your credit score over a period of time can raise your chances of procuring loans with better terms in the time to come. For this to happen, one has to start making timely payments, reducing outstanding debt, and avoiding new credit inquiries.
How does skipping a deadline get reflected in the credit score?
When you miss a payment deadline, it usually gets reported to credit bureaus such as CIBIL and the information can stay on the report for a long period.
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