How to Reduce Your Credit Utilization Ratio for a Better CIBIL Score?

Maintaining a healthy credit score is essential for securing favorable financial opportunities, such as loans, credit cards, and even housing rentals. One critical factor influencing your Credit Score is your credit utilization ratio.

In this blog, we’ll explore what the credit utilization ratio is, why it matters for your CIBIL score, and actionable strategies to reduce it effectively.

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How to Reduce Your Credit Utilization Ratio?

1. Pay Down Existing Balances

The most straightforward way to reduce your credit utilization ratio is to lower your outstanding credit card balances.

• Prioritize High-Interest Cards: Focus on paying off cards with the highest interest rates first to save on interest payments.
• Make Extra Payments: Whenever possible, make payments beyond the minimum required to reduce the principal balance faster.
  

2. Increase Your Credit Limits

Requesting a higher credit limit can instantly reduce your utilization ratio, provided your spending habits remain consistent.

• Maintain Good Payment History: Lenders are more likely to approve credit limit increases for customers with a strong payment history.
• Avoid Multiple Requests: Frequent credit limit increase requests can negatively impact your credit score.
  

3. Spread Out Your Spending

Distribute your expenditures across multiple credit cards to avoid over-relying on a single card.

• Use Multiple Cards: If you have more than one credit card, utilize them strategically to keep individual card balances low.
• Monitor Spending: Keep track of your spending habits to ensure you don’t exceed limits on any card.
  

4. Avoid Closing Unused Credit Cards

Closing credit cards reduces your total available credit, potentially increasing your utilization ratio.

• Keep Older Accounts Open: Even if you don’t use them frequently, maintaining older credit accounts can boost your total credit limit.
• Use Occasionally: Make small purchases on unused cards to keep them active without accruing significant debt.
  

5. Pay Off Your EMIs More Than Once a Month

Instead of waiting until the due date to settle your credit card balances, making periodic payments throughout your billing cycle can significantly reduce your credit utilization ratio. Here’s how:

• Understanding Reporting Cycles: Credit card issuers typically report your statement balance to credit bureaus—Equifax, Experian, and TransUnion—once per billing cycle. This reported balance is what credit bureaus use to calculate your CUR.
• Frequent Payments: By paying down your credit card balances regularly (weekly or bi-monthly), you ensure that the balance reported to the credit bureaus is lower, thereby reducing your CUR.
  

6. Monitor Your Credit Report Regularly

Regularly reviewing your credit report helps you stay informed about your credit utilization and spot any discrepancies.

• Check for Errors: Ensure all reported balances and credit limits are accurate. Dispute any inaccuracies with CIBIL.
• Track Progress: Monitoring allows you to see the impact of your efforts to reduce your utilization ratio.
  

7. Consider a Debt Consolidation Loan

If managing multiple credit card balances is challenging, a debt consolidation loan can simplify payments and potentially lower your utilization ratio.

• Single Payment: Consolidate multiple debts into one loan with a lower interest rate.
• Improve Credit Mix: Diversifying your credit types can positively affect your CIBIL score.

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How is Credit Utlilization Ratio Calculated?

Credit Utilization Ratio is the percentage of your total available credit that you’re currently using. It is calculated using the following formula:

Credit Utilization Ratio = (Total Outstanding Credit Balances/ Total Credit Limit​)×100

Example:

• Total Credit Limit: ₹300,000
• Total Outstanding Balance: ₹90,000

Credit Utilization Ratio = (90,000/ 3,00,000) x 100

Therefore, CUR = 30%

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What is a Good Credit Utilization Ratio?

In India, a good credit utilization ratio is typically 30%. This means that you are using no more than 30% of your total available credit across all your credit cards and revolving accounts.

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Credit Utilization Ratio and Home Loans

Lenders assess CUR to evaluate your ability to manage debt and determine the risk of lending to you.

A lower CUR, ideally below 30%, signals financial responsibility and enhances your creditworthiness, making you a more attractive candidate for a home loan.

1. Loan Approval: A low CUR increases your chances of getting approved for a home loan, as it indicates you are not over-leveraged.
2. Interest Rates: Borrowers with a favorable CUR often qualify for lower interest rates, reducing the overall cost of the loan.
3. Loan Amount: A healthier CUR can qualify you for a higher loan amount, enabling you to purchase a more valuable property.
4. Credit Score Impact: Since CUR significantly affects your credit score, maintaining it below 30% ensures a higher score, which is pivotal in the home loan approval process.

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Conclusion

Maintaining a low credit utilization ratio is essential for achieving a superior CIBIL score and unlocking better financial opportunities, including favorable home loans and lower interest rates.

Planning on buying your new home? Take advantage of Credit Dharma’s fully digital, hassle-free, and swift home loan process. Experience a seamless journey from application to approval, ensuring you get the best terms with minimal effort.

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Frequently Asked Questions