Personal Loan: How does credit utilisation ratio influence loan eligibility?

A personal loan comes in handy when you need urgent funds as it does not require any collateral and can be utilised for multiple purposes. However, if you need a personal loan for emergency purposes, you need to know various factors that determine your eligibility to get one. One such factor that has an indirect impact on your personal loan eligibility is the credit utilisation ratio.

What is the credit utilisation ratio & how it is calculated?

A credit utilisation ratio reflects the portion of credit you utilise from the available credit limit. It is also known as credit utilisation rate, which is the amount of credit used to the total amount of revolving credit available to you. Hence, the credit utilisation ratio is the total amount that you owe on all credit cards in accordance with the total credit limit available. It is mostly indicated as a percentage. It is one of the parameters through which credit score is calculated.

What is an ideal credit utilisation ratio?

Every lender or credit agency has its own way of determining an ideal credit utilisation ratio. However, most banks recommend having a credit utilisation ratio below 30 per cent. It is advisable to check with your respective lenders to know about their ideal credit utilisation ratio.

Consequences of high credit utilisation on credit score

Credit utilisation plays an indirect yet crucial role in determining personal loan eligibility. As it significantly influences your credit score, which is a key factor in evaluating your eligibility for a loan. A credit score reflects your financial reliability and ability to repay debts on time.

When your credit utilisation ratio is low, it signals that you're managing your credit wisely and staying within your limits. This positive behaviour contributes to a higher credit score. On the other hand, a high credit utilisation ratio suggests a higher level of debt relative to your available credit, which can lower your credit score.

A strong credit score, often resulting from low credit utilisation ratio, increases your chances of qualifying for a personal loan. Furthermore, it may help you secure loans with lower interest rates and more favourable terms, as it reduces the lender's perceived risk.

Proven strategies to lower your credit utilisation ratio?

1. Repay the entire amount: If you use a credit card, always repay the entire outstanding amount on your card. Clearing credit card dues on time will help maintain a low credit utilisation ratio.
2. Limit expenses: It is advised not to spend as much as your credit limit. By limiting your expenses on your credit card, you can maintain a low credit utilisation ratio.

• Credit limit: If you are not able to control expenses on your credit card, try to increase the credit limit on your credit card. You can request the issuer to increase the credit limit on your card. The issuer lender may look at certain criteria before approving your request for a change in credit limit.
• Strategise the use of credit cards: Use your credit cards in such a way that you can have enough credit limit. You can do so by not using some credit cards for some time; this will increase your overall available credit, which further lowers the credit utilisation ratio.

In conclusion, the credit utilisation ratio is crucial in maintaining a good credit score. Try to maintain a low ratio even when you are not seeking a personal loan, as it will make it easier to get one in emergency situations.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.