Credit Card: How Much Of Credit Limit Should You Use?

Credit cards come with multiple benefits like easy access to money, discounts, reward points, EMI options and many other features. The credit card issuers are offering customised credit cards these days to meet the diverse needs of customers, from shopping to travel. The credit limit for each credit card is crucial for the users. The credit limit is the maximum amount of money approved by the card issuer, which can be used in a monthly credit cycle.

The credit card holders often look for higher credit limits, but using a larger amount from your approved credit limit could lead to financial problems. It’s important to understand the intricacies of credit utilisation ratio, which may impact your credit score and overall financial burden.

Credit utilisation is the ratio that represents your total credit card outstanding compared to your approved credit limit. It is determined by dividing the amount you owe to the card issuer by your credit limit and multiplying the figure by 100 to express it as a percentage. This percentage indicates how much you are utilising your available credit. It is a significant factor for lenders to assess your creditworthiness and financial responsibility. A high credit utilisation ratio can also negatively affect your credit score.

Generally, a lower credit utilisation ratio is favourable and demonstrates responsible credit management. A credit utilisation ratio of below 30% of your available credit is typically considered good. For example, if you have a credit limit of Rs 40,000, keep your balance below Rs 12,000 (30% of Rs 40,000).

Consider the following strategies to improve your credit utilisation ratio:

Monitor your spending: Keep track of your credit card spending and avoid making unnecessary purchases that could boost your outstanding debt.

Avoid closing credit card accounts: Closing a credit card account reduces your total available credit, thus increasing your credit utilisation percentage. Instead, leave unused accounts active to ensure a balanced credit mix.

Distribute your purchases across multiple cards: Spread your purchases over different credit cards to lower your credit utilisation ratio.

Set up balance alerts: Keep a check on your credit card balances and set up alerts to monitor your spending to ensure you don’t exceed a healthy utilisation rate.

Pay maximum of your outstanding amount: Try to reduce your outstanding balances by paying more than the minimum amount required each month. It’s advisable to clear the total outstanding to maintain a healthy credit score.

Make multiple payments each month: Paying off your credit card balances multiple times, rather than one large payment on the due date, can also help manage your credit utilisation ratio.

Increase your credit limit: Request to increase the credit limit on your current cards or consider applying for a new credit card to enhance your total accessible credit.