Important facts for credit card users to know about credit utilisation and CIBIL score

As a credit cardholder, you enjoy secure, paperless payments online and offline along with a range of perks. From cashback and discounts to reward points as well as other privileges, all these perks help you save money while making it more convenient for you to transact seamlessly.

However, for all the benefits that they offer, credit cards can also lead you astray if you swipe recklessly. By not working out a budget and using them carefully, you can fall into a debt trap that can be very heavy on the pocket.

Some of the reasons for this are that credit cards come with a high interest rate. While you have around 45 interest-free days to clear your credit card bill without a charge, when you miss a payment or only pay the minimum amount due, you end up paying a penalty and a high interest on the dues. Over time, this can accumulate into an overwhelming debt.

Moreover, all your history of credit card bill payments is recorded by credit information companies, such as TransUnion CIBIL, Equifax, CRIF High Mark and Experian. The credit score assigned by TransUnion CIBIL is called the CIBIL score and is widely used by a number of lending institutions and credit card issuers.

This is why it is so important for you to spend wisely when you use a credit card and ensure that you clear your credit card bills in their entirety and on time. However, do you know what effect your credit card utilisation has on your credit score?

This is key to your financial well-being and also answers the question of how to increase CIBIL score as a credit cardholder. Read to know more.

How Are Credit Card Limits, Credit Utilisation Rate and Credit Score Related?

Credit utilisation refers to how much credit you use from the amount of credit you have available. Your credit utilisation ratio is a percentage of the same concept. In the context of credit cards, credit utilisation is related to how much credit you use as compared to your credit limit.

For instance, if you have a credit limit of ₹50,000, and you use ₹25,000, your credit utilisation rate is 50%. If you swipe up to the limit of ₹50,000, your credit utilisation ratio is 100%.

Credit utilisation has a huge impact on your credit or CIBIL score. So, if you want to know how to increase your CIBIL score, keep the following in mind. With a high utilisation of credit, your CIBIL score drops. This is because when you use up all or most of the credit that is available to you, you seem credit hungry.

This makes it look like you cannot manage your expenses without depending on credit. Over-reliance on credit is considered a bad sign, and thus this action decreases your score. Remember, experts recommend your credit utilisation ratio to be between 30% and 40%.

This means that you should use only up to 40% of your credit card limit every month. Taking the same example as above, if your credit card limit is ₹50,000, you should strive to swipe your card only up to ₹20,000.

Of course, this doesn't mean that you cannot swipe up to the limit once in a while to address urgent needs or emergencies. Just remember not to make it a habit. This way, you can boost your credit score and use your credit card in a more disciplined and intentional manner.

How to Decrease Your Credit Utilisation Ratio as a Credit Card User
Now that you know the relationship between credit utilisation and your CIBIL score, here are two simple ways in which you can lower your utilisation rate.

• Use multiple credit cards

A smart way to decrease your utilisation ratio is to use two or more credit cards. This way, you can use each of them until you exhaust 35% of the credit limit. This keeps your utilisation of credit low, while giving you the spending room you need.

For instance, apart from one credit card with a ₹50,000 limit, you can get another one with a limit of ₹1 Lakh. You can use the first card until you hit ₹20,000 and the second one until you hit ₹40,000 to maintain the utilisation rate at 40%. This way, you can spend up to ₹60,000 using credit cards without hampering your credit score.

What's more, having two credit cards gives you access to a wider range of perks and rewards.

• Ask for an increase in your credit card limit

Another easy way to achieve a similar goal is to ask your issuer to increase your credit limit. Banks are likely to do this when you pay your credit card bills on time and show an increase in your income over time.

With a higher limit, you can increase your utilisation while still maintaining your CIBIL score. For instance, if you can get your credit card limit increased from ₹50,000 to ₹1 Lakh, you can now use your card up to ₹40,000 while keeping your utilisation rate low.

How to Boost Your Credit Score as a Credit Cardholder

Apart from being vigilant about your credit utilisation rate, you can improve your credit score by following these tips as a credit card user:

Set reminders or use auto-debit facilities to pay your credit card bills on time. Not paying your bills by the due date has the biggest adverse impact on your CIBIL score.

• Pay your credit card bill in full and not just the minimum amount due.
• Swipe your credit card wisely, keeping your budget and credit utilisation limit in mind.
• Do not apply for multiple credit cards in the short span of time. Every time you apply for a new card, the issuing bank runs a credit score check, which decreases your score by a small margin. When you apply for multiple cards at the same time, your score can drop by a larger number due to multiple inquiries by issuers.
• Keep your older credit cards active to create a lengthier credit history.

Now that you know how to increase CIBIL score as a credit cardholder, make sure you use your card carefully. To keep track of your score, you can run a free credit score check. TransUnion CIBIL as well as other credit bureaus allow you to check your score and report for free once a year. After this free check, you can monitor your score by paying a small subscription fee.

Financial marketplaces and lenders also offer you the service of a free credit score check. You can use this facility to ensure your score is at the ideal level of 750 or more. This way, you can get affordable credit in the future and get access to premium credit cards that offer a wider range of benefits.