Should you use your entire credit card limit?

Vikram Singh frequently uses his two Credit Cards to their maximum limits but is diligent in paying off the bills on time. However, when he applied for a mortgage, he encountered unexpected delays. The issue? His credit report highlighted a high credit utilisation rate, as he was regularly using nearly the entirety of his available credit.

To avoid a situation like Vikram's and maintain a healthy credit report, it's crucial to understand credit utilisation and its impact on your credit score:

Understanding credit utilisation rate: This rate, often expressed as a percentage, is the ratio of your current credit usage to your total available credit. For instance, if Vikram has a combined credit limit of ₹1,00,000 on his cards, and he spends about ₹95,000 monthly, his credit utilisation rate would be 95%.

Why high utilisation is problematic: Consider being the bank manager reviewing Vikram's loan application. If his monthly home loan payment is ₹50,000, and his income is ₹1,50,000, spending ₹95,000 on Credit Cards leaves only ₹55,000 for other expenses. This makes Vikram a high credit risk due to his extensive use of available credit, suggesting potential difficulty in managing additional EMIs.

Ideal credit utilisation rate: Financial experts generally advise keeping your credit utilisation rate below 30%. A lower rate is seen as a sign of sound financial management, indicating a lower likelihood of irresponsible spending.

Impact on credit score: Credit scores are calculated using various factors, including Credit Card utilisation rates. Generally, a lower rate correlates with a higher credit score.

[Also Read: 7 factors that pull down your credit score]

Improving credit utilisation rate: Vikram has several options to better his rate, such as:

• Reduce card expenses, limiting them to essential payments.
• Acquire an additional Credit Card to distribute expenses, being cautious not to increase total spending.
• Request a credit limit increase from his card issuers, being mindful not to escalate his spending.
• If reducing card expenses isn't feasible, he should aim to pay off his card dues more frequently, such as bi-monthly, to lower his monthly utilisation ratio.

Axis Bank provides various Credit Cards with unique benefits, including Edge Reward points based on spending patterns, redeemable for attractive offers. For more information about Axis Bank Credit Cards, visit our website.

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