Credit Utilization And Its Impact On Credit Scores

A credit score and the ability to establish credit are only two of the many advantages of credit cards. Nevertheless, suppose you have a high credit usage rate on your cards for making numerous UPI transactions. In that case, you may have several negative effects, including poorer credit ratings, a challenge making larger monthly payments, and a higher interest rate on your cards if you ever make a late payment. Your credit usage significantly impacts your credit scores, so it’s important to understand what it is and how to manage it to receive the best credit rating and the perks that go along with it.

Let us understand credit utilization better:

Credit utilization refers to the percentage of your available credit that you’re currently using. It’s a significant factor that impacts your credit score. Your credit score is a numerical representation of your creditworthiness, and several factors determine it. One of these factors is your credit utilization ratio.

Your credit utilization ratio is calculated by dividing the total amount of credit you’re using by the total amount of credit available to you. Suppose, If you have a credit limit of $10,000 and have used $5,000, your credit utilization ratio would be 50%.

How does the credit utilization ratio affect your credit score?

You can lose credit card points if your credit utilization ratio is high. The reason is that it suggests you’re relying heavily on credit, and you may be more likely to default. Lenders could interpret that as a sign that you aren’t financially stable, which could hinder your future loan or credit applications.

On the other hand, a low credit utilization ratio can positively impact your credit score. That is because it suggests that you’re not relying heavily on credit and are managing your finances responsibly. If you have a stable financial situation, lenders may be more likely to approve you for credit or loans.

Tips for maintaining a good credit utilization ratio:

It is ideal to use less than 30% of your available credit while doing UPI money transfer using your credit card to maintain a perfect credit utilization ratio. The following strategies can help you achieve a low credit utilization rate:

  1. Pay your credit card balances in full each month: This will help you avoid accruing interest and keep your credit utilization low.
  2. Raise your credit limit: If you have a good payment history and credit score, you may be able to request a credit limit increase from your credit card issuer. That will increase your available credit and decrease your credit utilization.
  3. Keep an eye on your spending: Monitoring your spending and keeping track of your credit card balances can help you avoid overspending you do through UPI payments and keep your credit utilization low.
  4. Use multiple credit cards: If you have multiple credit cards, using them all sparingly can help keep your overall credit utilization low.

Remember, maintaining a low credit utilization is only one factor that can help improve your credit score. It’s important to make timely payments, avoid opening too many new accounts, prefer making payments through debit cards while using BHIM UPI, and have a mix of credit types to build a strong credit profile. It’s also important to note that your credit utilization ratio is not the only factor that impacts your credit score. Other factors include payment history, length of credit history, types of credit, and new credit inquiries.

Vito Paucek
the authorVito Paucek