The focus has always been on highlighting the adverse implications of not using credit cards carefully. Improper use of credit cards has significantly influenced the credit scores and credit profiles of individuals.
Even the recent advisories from credit bureaus along with the Reserve Bank of India (RBI) underline the importance of maintaining a proper credit utilisation ratio to primarily ensure long term financial stability and a clean credit profile for lenders to consider giving future loans and credit facilities on easier terms and conditions.
Concept of credit utilisation and its impact
Credit utilisation is simply the percentage of available credit that an individual uses. This is a crucial criteria in deciding one’s creditworthiness and credit score. Generally exceeding 30% of the credit limit can be a clear indication of financial overextension to lenders. This has the potential to influence the creditworthiness of an individual in a negative way.
For example, if you have a credit limit of ₹50,000 then you should not use more than 30% of this credit limit i.e., ₹15,000. This means that you should never extend your credit limit beyond ₹15,000 for shopping, buying non essential goods and services if your credit limit is ₹50,000.
This will protect your financial health and defend your credit score from downgrades. That is why maintaining a lower credit utilisation ratio is always advisable and the most prudent way to preserve a healthy credit profile.
What are the consequences of a high credit utilisation?
A high credit utilisation ratio can result in a lot of complications for credit card users. Some of the difficulties that an individual with a high credit utilisation can face are:
- A noticeable drop in credit score.
- Serious difficulties and complications in securing new loans or credit facilities.
- Escalation in interest charges due to partial payments.
- Reduced negotiating power, degradation of relations with financial institutions.
- Negative remarks in credit reports issued by bureaus like CIBIL, CRIF High Mark, Equifax or Experian
What should credit card users clearly understand?
Over the last 12 years, the digital payments in the country have witnessed a 94-fold increase in volume. Not only this the total credit card count has doubled in the country. This rapid growth in credit distribution creates an urgent requirement for all credit card users and regulatory bodies to be careful with the management of their credit utilisation ratios.
The focus needs to now shift towards educating credit card users on why they should not max out their credit. Things become even more complicated when the total number of defaults on credit cards have also rapidly risen over the last four years. With the credit card NPA’s spiking by over 500% in the last few years according to RBI data.
These recent developments are clear signs for sensible credit card users to keep their card usage in check. To manage the same light needs to be thrown on managing the credit utilisation ratio properly.
Hence, to help manage credit cards better, here are quick answers to common questions on credit utilisation ratio and its long term implications:
Frequently Asked Questions
Q1: How does maxing out my credit card affect my credit score?
Maxing out on your credit card increases your credit utilisation ratio. This can seriously lower your credit score. A high score means over dependence on credit and is not taken positively by lenders.
Q2: What steps can I take to improve my credit score after maxing out my card?
To boost your credit score, focus on bringing down your credit utilisation below 30%. For the same, make on time payments. You should also monitor your credit report consistently to identify areas where you can put in effort and improve.
Q3: Are there regulatory guidelines addressing high credit utilisation?
Yes the Reserve Bank of India (RBI) consistently promotes responsible lending and borrowing practices through various notifications and media announcements. These include stricter evaluation criteria for unsecured loans and credit cards to combat financial risk.
Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
