How does regular credit card usage affect your credit score over time? Experts explain

So you have your credit card and your bank has given you an offer of some tempting loan offers. You have been eying those money splurging dreams that you have been waiting so hard for, that trip to Bali or London, that fancy bike, that LCD TV, etc. You have the urge to max out your credit.

Warning – bad move. That urge to splurge may be leaving you with a bad headache in your finances going forward.

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“Credit utilisation refers to the percentage of your available credit that you are currently using, and it plays a crucial role in determining your credit score,” explains Ashish Tiwari, Chief Marketing Officer, Home Credit India.

The impact of credit utilisation on your credit score is significant and can affect your creditworthiness positively or negatively, depending on the usage.

One should never exhaust the limit of their credit card/ revolving credit lines. “It is ideal to keep the average credit utilisation ratio around 50 per cent,” advises Tiwari.

A high credit utilisation ratio, on the other hand, reflects a credit-hungry mindset, which lenders perceive as financially risky behaviour. It suggests a potential inability to manage finances effectively, leading to a lower credit score.

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“A lower utilisation of the available credit limit of your credit card reflects responsible spending and allows for buffers in case of any contingency,” says Sanjeet Dawar, Managing Director, CRIF High Mark. Therefore, a lower limit utilisation is considered favourable while computing your credit scores.

“A low credit utilisation ratio may showcase prudent credit management, positively influencing your credit score and enhancing your appeal to lenders,” says Bhushan Padkil, SVP & Head - Direct to consumer business at TransUnion CIBIL Limited. Regularly monitoring and managing your credit utilisation not only helps in maintaining but also in improving your credit health.

“Credit utilisation makes up 30% of your credit score,” explains Vaibhav Shah, Joint Head, Credit, Capri Global, which directly affects your credit score.

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When you have high credit utilisation, meaning you're using a lot of your available credit, it can lower your credit scores.

“Lenders see this as risky because it might mean you're having trouble paying back what you owe,” explains Shah of how lenders view your credit spending.

Thus, it's best to keep your credit utilizations low compared to your credit limits to maintain a healthy credit score.

It's important to note that credit utilisation is calculated both on an individual account basis and as an overall ratio of all your credit accounts. Experts recommend keeping the utilisation low on separate accounts as well as maintain a low overall credit utilisation ratio.

“However, having a zero-credit utilisation ratio isn't necessarily a good idea either,” says Tiwari. Some credit scoring models may interpret a zero ratio as a lack of credit history, which can potentially result in a lower credit score. Additionally, relying on zero credit utilisation means missing the opportunity to demonstrate responsible credit use and build a strong credit profile.

Manik Kumar Malakar is a personal finance writer.