Credit cards have reinvented the world of finances today. These small cards have completely changed the way individuals spend and purchase products and services. Credit cards essentially allow customers to borrow money against a line of credit, which they will have to repay at a later stage. However, there is a specified limit that is pre-decided for each credit card and card holders cannot go above this limit. Customers are advised to pay their bills at the earliest and not just settle for the minimum amount due as this will have an adverse effect on their credit scores and will be visible in their credit reports.
A credit information report contains all details pertaining to the individual’s credit card transactions, such as their credit score, account information, contact information and so on. A credit score on the other hand, is a 3 digit numeric representation of an individual’s credit report. This number can range between 300 to 900. If scores are above 760, then the individual’s credit score is high.
What is a Credit Score?
A credit score is an important parameter to judge an individual’s creditworthiness and the financial risk that he/she poses. In case an individual has low credit scores then he is deemed to be a risky customer by lenders and financial institutions, resulting in that individual not getting worthy financial deals and offers. If an cardholder has a credit score that is above 760, then he will be able to receive loans without hassles and at a good rate of interest. He will also be in the position to bargain for better deals since a good credit score is an indication that the individual will repay all necessary loans within the stipulated amount of time. Credit scores are provided by independent bureaus such as CIBIL, Experian and Equifax. CIBIL is one of the most trusted credit bureaus mainly due to the fact that it is the oldest.
Credit Utilisation Ratio or CUR is the reflection of a credit card usage with respect to the available spending limit. For example, in case the available spending limit of a credit card is Rs.1 lakh and individuals use Rs.60,000 from that limit in one month, their Credit Utilization Ratio will be 60%. This ratio is used to assess the cardholder’s credit managing capacity and habit.
Disadvantages Of A High Credit Utilization Ratio
Cardholders must always strive to maintain a low or relatively low credit utilization ratio. This is because, a high credit utilization ratio indicates that the cardholder is in a cash crunch consistently or is a compulsive spender. A high credit utilization ratio every month denotes that there is a chance of the customer defaulting on his payments which in turn has a negative impact on his credit score. Hence, applicants must ensure that their credit card spending is under control and within the stipulated limit.
Are Multiple Credit Cards Advantageous?
For those who hold more than one credit card, credit utilization ratio can be maintained a lot more easily. They can advantage of the fact that each card comes with its spending limits and thereby reduce their credit utilization ratio. Credit utilization ratio on each of the cards is calculated separately and collectively. For example, an individual holds an SBI credit card with a spend limit of Rs.1 lakh and an IndusInd Bank credit card with spend limit of Rs.50,000. He spends Rs.40,000 from the SBI card and his credit utilization ratio, is therefore, 40%. In case he uses the same amount from his IndusInd Bank card, his credit utilization ratio is a whopping 80% which reflects badly on his credit report and subsequently, his credit score. Therefore, the solution would be to take advantage of the spend limits on both the cards. For example, instead of spending Rs.40,000 from the IndusInd Bank card alone, the customer can split the amount between both cards i.e., Rs.30,000 from the SBI credit card and Rs.10,000 from the other card. By doing so, the credit utilization ratio on the SBI card would be 30% and 20% on the IndusInd Bank credit card. These ratios are good enough to result in a healthy credit score. Keeping the credit utilization ratio between 25% to 40% is advised.
Word of Advice
Credit cards should only be used when absolutely necessary and judiciously. It is easy to rack up a debt on credit cards if customers misuse their spend limits or fail to pay their bills on time. Also, cardholders are advised to not just pay the minimum amount due but to pay the entire debt on time, if possible.
Cardholders should use a credit card only when required. If possible, they must try to use cash, cheque or debit cards to pay for their purchases. They must evaluate and understand their monthly usage limits and patterns. In case they are spending more than they should, they will have to step back and assess their spending habits. Another option cardholders have, is to request their credit card provider for a higher spend limit which would reduce their credit utilization ratio. For example, if they spent Rs.40,000 on a card with Rs.1 lakh as the limit, their credit utilization ratio would be 40%. If the limit was increased to Rs.1.5 lakh, then spending Rs.40,000 would result in a credit utilization ratio of 26%.
In case a cardholder decides to close one credit card account, they must ensure that the spend limits on the other cards are increased. If this is not done, the credit utilization ratio on the other cards will decrease quite significantly. Hence, it is advisable for customers to keep their account open but spend judiciously.
In case an individual wishes to procure a loan, a smart move would be to avail a personal or secured loan rather than using credit cards for this purpose. Credit card debts are quite hefty and the individual will have a hard time repaying it back due to their high rates of interest.
Credit cards are one of the most versatile and heavily used financial products in the market today. Credit cards do not just allow a customer to borrow money against a line of credit, but also allows him/her to benefit from a number of perks such as dining discounts, travel offers, fuel surcharge waiver and so on. Using this product carefully will result in a high credit score and a good credit report.
FAQs on CIBIL Scores and Credit Utilization Ratio through Multiple Credit Cards
- Can I use my credit card to withdraw cash without impacting my CIBIL score?
- What is the ideal credit card credit utilisation ratio?
- Can having a high monthly income increase my chances of qualifying for many credit cards?
- Does having many credit cards impact your credit score?
- Will my CIBIL score be impacted if my credit utilisation ratio exceeds 70% every month?
- Is it good to have zero credit utilisation?
- How does credit utilisation work with multiple cards?
No, using your credit card to make a cash withdrawal is an indication of debt hungriness caused by financial insecurity. This type of conduct warns lenders not to approve credit card and loan applications. Thus, it is strongly advised that you must not withdraw cash against your credit card.
The ideal credit utilisation ratio ranges between 35% and 40%. However, it is recommended to limit it to 35%.
Your monthly income plays a significant role in determining whether you qualify for a loan or credit card, and a high salary can increase your chance of getting approved for credit. However, even with a high monthly salary, there is a good chance that you won't be given credit if you have a bad history of repaying your previous debts.
No, your credit score is not impacted by having many credit cards. However, having a bad history of repaying debt affects your credit score.
You must ensure to keep your credit utilisation ratio at 35% of your maximum credit limit provided by your bank. A poor credit utilisation ratio is among the factors that can significantly lower your CIBIL score.
Your credit score won't benefit from a 0% credit utilisation rate. It is recommended to keep your credit utilisation ratio below 35% to boost your credit.
If you have many credit cards linked to your account, you have access to more credit. This should lower your credit utilisation ratio if your overall expenditure stays the same.
TransUnion CIBIL is one of the leading credit information companies in India. The company maintains one of the largest collections of consumer credit information in the world. CIBIL Score plays a key role in the lives of consumers. Banks and other lenders check the CIBIL Score of the applicants before approving their loan or credit card application. Consumers can visit the official website of CIBIL to check their CIBIL Score and Report.