In this world of credit cards, credit utilization ratio (CUR) and credit limit are 2 major terms that are very commonly used. Heard of these terms right? The major question is, why do the 2 terms matter to you as a credit card user? Well, if you have been wondering about this, then here’s the answer. Continue reading to know.
Let’s begin with understanding what these terms are.
Credit card limit
Every credit card issuer may be an Axis Bank credit card or ICICI Bank credit card; all of them offer a credit card limit. This limit is fundamentally the maximum credit amount you are eligible to avail or borrow from your card issuer for the purchase. This limit is generally determined by the lender after factoring in specific aspects of your credit profile, like your credit score and income.
Credit utilization ratio (CUR)
CUR is the overall amount that you have borrowed and owe your lender against your overall credit card limit.
What is the major role played by credit utilization ratio (CUR)?
While it might not appear like a massive deal, your credit utilization ratio plays a major role in forming your financial health and profile. Ideally, you must stick to nearly 30 to 40 percent of the utilization ratio. Now you might wonder why this is required, as you are entitled to use the whole credit card limit.
Well, yes, you are entitled to use the entire credit card limit. However, using the whole credit card limit even if you can repay your balance outstanding without any fail shows you as a credit hungry individual. Creditors or lenders are not big fans of individuals having a credit hungry nature, and this might negatively impact your future chances of securing loan or credit card approval easily.
Besides being frowned upon by creditors or lenders, an increased credit utilization ratio (CUR) can even impact your credit score in a negative way. The credit utilization ratio is the basic key determinant of credit score. Thus, if you do not keep a close watch on it, it can bid tata to your strong credit score.
How to calculate your credit utilization ratio (CUR)?
You do not require being a mathematical geek to compute your credit utilization ratio. It is rather very simple. All you must do is divide the credit card outstanding by your overall credit card limit. For example, let’s assume you have spent or used Rs 60,000 and your overall credit card limit is Rs 1.50 lakh. Then your credit utilization ratio (CUR) in this situation will be 40 percent.
Now let us assume your balance outstanding is Rs 1 lakh. In such a situation, your credit utilization ratio (CUR) will be nearly 67 percent, which is very high. Here, you will require work towards reducing your credit utilization ratio.
4 easy ways to maintain a low credit utilization ratio (CUR)
Whether you have got a high credit utilization ratio or want to get back on track, or just looking for tips to easily maintain a low credit utilization ratio (CUR), these 4 simple tricks can help you:
Form a budget for spends
Forming a budget is the initial step when it is about financial planning. Ensure to check all your previous credit card bill statements to know where you have been spending a lot. Once you know where your money is going, it will become simpler for you to lower your expenditures that have been resulting in a high bill on credit cards and thus a high credit utilization ratio. Additionally, reviewing your past statements will even endow you with insights into how you have been using all your credit cards. In case you have been using it a lot, maybe it is time you split your purchases between your debit card and credit card. Ensure to make a budget by eliminating the unnecessary expenditures and splitting your buys between your debit and credit cards. Ensure to stick with this, and you will easily be able to maintain a credit utilization ratio (CUR) of 30 to 40 percent.
Request for a higher credit card limit
Initially, you might have got the credit card when you were earning extremely less than you probably may be earning now. Depending on your credit profile at that time, your creditor had assigned a credit card limit. However, your present credit profile might make you eligible for a better credit card limit than your existing credit card limit. Ensure to get in touch with your creditor and request an enhancement in your credit card limit. In case you have a good repayment track record, then your creditor would be happy to increase your credit card limit. Just ensure you do not enhance your spending with an enhancement in your credit card limit.
In case you hold an ICICI bank credit card or the credit card of any other creditor, ensure to dial the ICICI bank credit card customer number or customer number of the respective creditor to request an increase in your credit card limit.
Avail another credit card
Getting another credit card can enhance your overall credit card limit and keep your overall credit utilization ratio under check. For example, if your present credit card’s limit is Rs 1.50 lakh and you avail of another credit card offering a credit card limit of Rs 1 lakh, then your overall credit card limit will be Rs 2.50 lakh. This means your buying power will enhance by Rs 1 lakh. This, in turn, will enhance your credit utilization ratio (CUR).
Do not close your credit cards.
So, consider you have 2 credit cards, and you only use one of the cards. Of late, you have been thinking about closing your unused credit card. Note that it is a bad idea! Wondering how? Even though you do not use the card, it is recommended that you continue keeping your credit card as the credit card limit is added to your overall credit card limit, and this, in fact, gives you an enhanced credit limit. An enhanced credit card limit, in turn, keeps your credit utilization ratio under a favourable limit.
In the end, it all comes down to responsible credit behaviour habits. Thus, always ensure to use your credit cards responsibly, maintain a credit utilization ratio of 30 to 40 percent and, most importantly, timely repay your outstanding dues.
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