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Credit Utilisation and CIBIL score

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"Anything in excess is a sin" goes an old adage. Like in life, even in handling your finances, indulging can prove to be a spot on your credit history. Take for instance, credit card utilization, some help to improve his Credit Information Bureau (India) Limited (CIBIL) credit score


A credit bureau typically looks at this in two ways. First, if you have hit the limit on credit cards and there is an untoward development like loss of job, it is highly likely that you may default on the repayment of outstanding. A point to note here is that the credit card outstanding is unsecured debt for the credit card holder and one who uses maximum such limit, which indicates that the individual has a voracious appetite for credit. Naturally, for such individual her CIBIL score goes down.

To better deal with this situation, you should understand credit card utilisation level. Credit bureau interprets credit card utilisation on both parameters - utilisation per card and utilisation of overall limit - all cards put together. This can be understood with an example. Suppose you have two credit cards - each with Rs 1 lakh credit limit. You spend Rs 1 lakh on the first credit card and Rs 5000 on the other. Credit card utilisation for these cards stand at 100 percent and 5 percent respectively. And considering this, the overall limit the utilisation is at 52.5 percent. Here the 100 percent utilisation of first credit card's limit can pull down your credit score, though the overall credit utilisation may not be alarming. As a rule of thumb, you should limit your utilisation of credit card limit to 30 percent, jointly - which means on each card and all cards put together this number of 30 percent matter.

Now let us look at how to deal with this issue. First, try to analyse the main reason behind such high utilisation of credit limit. If your credit limits are low, enhance it by offering recent income proof. Spend across credit cards - instead of utilising 100 percent limit of one card and none of the other, spend on both cards. If you are spending too much money, cut down on your expenses. If you are not allotted more credit limit apply for a secured credit card or pay using other channels such as net banking. If you see your expenditure ballooning in a particular month, you may also pay your credit card issuing bank, much before the end of the cycle, and bring down your outstanding credit. Bring down the credit card utilisation level below 30 percent for six months to one year, and you will see your CIBIL credit score gradually improving. Observing these rules can help sail through various financial hardships. Because be it food or money, exercising control can help you relish it well.

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