Credit Utilization Ratio
Reviewed by Aug 27, 2020| Updated on
What Is Credit Utilisation Ratio?
The credit utilisation ratio is defined as the percentage of credit that is being utilised from a borrower’s total available revolving credit. It is one of the most important factors that can impact your credit score. All credit bureaus calculate the credit score of borrowers with the help of the credit utilisation ratio. A high credit utilisation ratio can result in a poor credit score for borrowers.
How to Calculate Credit Utilisation Ratio?
Credit utilisation ratio can be calculated using the formula:
Credit Utilisation Ratio = (Total Outstanding Amount/Total Available Credit) X 100
Consider the example where you own three credit cards, X, Y and Z with a total credit limit of Rs 2 lakh. Also, you have an outstanding balance of Rs 25,000 on X, Rs 60,000 on Y and Rs 3,000 on Z.
The total outstanding balance including all the three cards will amount to (Rs 25,000 + Rs 60,000 + Rs 3,000) i.e. Rs 88,000. Now, the credit utilisation ratio can be computed as (88,000 / 2,00,000) X 100 = 44%
Here, your credit utilisation ratio is 44%. You can also calculate the credit utilisation ratio for each individual credit card in the same manner.
What is a Good Credit Utilisation Ratio?
It is recommended to always keep a low credit utilisation ratio as it is an indicator that the borrower is managing his credit responsibilities appropriately. However, a higher ratio could be considered an indicator that the borrower is overspending and having trouble with managing finances. According to most credit bureaus, the ideal credit utilisation ratio should be lower than 30% of the total available credit limit.