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How Credit Utilisation Affects Credit Score

Published on Apr 30, 2024Updated on May 21, 2024

How Credit Utilisation Affects Credit Score

Ever wondered how your credit score gets calculated? There are many factors that contribute to the 3-digit number that reflects your creditworthiness. One of the major factors is the credit utilisation ratio. 

But why does credit utilisation hold such an influence? To put it simply, it serves as a reflection of your financial responsibility and credit management habits.

This article will break down what exactly the credit utilisation ratio is, how it affects your overall credit score, and tactics to keep it at an ideal value.

What is the Credit Utilisation Ratio?

The credit utilisation ratio is a percentage value that shows how much credit you are using against the limit available to you. The ratio often reflects how well current debts are being managed, indicating the likelihood of repaying present debts as well as future loans. This ratio allows lenders to determine your capability to manage your finances.

For instance, if you have a credit card with a total limit of INR 1 lakh and you have a balance of INR 20,000, your credit utilisation ratio would be (20,000 / 1,00,000)*100 = 20%. 

What is the Recommended Credit Utilisation Ratio?

While it may differ from lender to lender, it is recommended that the ideal credit utilisation ratio of a credit account holder should be equal to or below 30%. Having a lower credit utilisation ratio assures the lender of the client’s financial responsibility. It is important to note that having a credit utilisation ratio of 60% and above might get your loan or credit application rejected. 

What is a Good CIBIL Score in India?

A credit score is a 3-digit value that acts as a summary of your credit history. It is also commonly referred to as a CIBIL score. It is the score computed by TransUnion CIBIL, one of the most important credit information companies in the country. It typically ranges from 300 to 900, with a higher score indicating the client’s reliability and creditworthiness. Having a good CIBIL score increases the chances of getting approved for loans with favourable terms, such as lower interest rates and higher credit limits. 

Although it differs from one lender to another, it is typically assumed that a credit score of 700 to 749 is “good” and anything above 750 is considered “excellent”.

Must Read: Tips To Get An Excellent CIBIL/Credit Score 900

How does the Credit Utilisation Ratio Affect your Credit Score?

Now imagine your credit or CIBIL score as a report card that shows the lender how good you are at managing your money. A high score shows financial institutions and lenders that you are responsible with your finances. Your CIBIL score is based on various factors, and one of the major ones is your credit utilisation ratio.

If you're using most of the credit available to you, it might seem like you're relying too much on borrowing money which would be a cause of concern to lenders. So the higher your credit ratio is, the lower your CIBIL score might be which reduces your chances of getting loan approvals. 

How to Calculate your Credit Utilisation Ratio?

  1. Find your credit card limit: Your credit card limit is like the most money you're allowed to borrow from the financial institution. It's the highest amount you can spend using your credit card.
  2. Check your credit card balance: This is how much money you've already spent or borrowed from the financial institution that has issued your credit card.
  3. Do the maths: Divide your credit card balance by your credit card limit. Let's say you have spent INR 200 on your credit card, and your credit limit is INR 1,000. When you divide INR 200 by INR 1,000, you get 0.2.
  4. Turn it into a percentage: Multiply the number you got after division (0.2 in our example) by 100 in order to determine the percentage. In our example, 0.2 multiplied by 100 equals 20%. Hence, your credit utilisation ratio is 20%.

Now you have calculated your credit utilisation ratio. It's like figuring out how much of your "borrowing money" you're using out of what you're allowed to borrow. Remember, it's good to keep this number low—it shows you're not using too much of your borrowing power. Please note that while we have considered a single credit card as an example, the credit utilisation ratio takes into account all revolving credit card accounts.

If you’d rather avoid manual errors in the calculation process, there are online tools available that will help you calculate the credit utilisation ratio.

What are the Factors that Influence your Credit Utilisation Ratio?

Your credit utilisation ratio is influenced by several factors such as:

  1. Credit card balances: The amount you owe on your credit cards affects your credit utilisation ratio. Keeping your balances low compared to your credit limits is crucial for a healthy ratio. 
  2. Credit limits: Research from credit reporting agencies suggests that individuals with higher credit limits typically have lower credit utilisation ratios, assuming they maintain reasonable balances.  
  3. Payment history: There is a strong correlation between timely payment history and lower credit utilisation ratios. Your track record of making payments on time influences your credit utilisation ratio indirectly. Timely payments help maintain lower balances, thus improving your ratio over time. 
  4. New credit: Opening multiple new credit accounts within a short period can increase your overall credit limit, potentially lowering your credit utilisation ratio. However, applying for new credit too frequently can also signal financial risk to lenders.

Understanding and managing these factors can help you maintain a healthy credit utilisation ratio, which is essential for your overall credit health.

Tips to Maintain a Low Credit Utilisation Ratio

Here are some tips that can help you maintain your credit utilisation ratio below 30%:

  • The most straightforward way is to focus on paying down your credit card balances.
  • Keep a close eye on your credit card balances so that you can make timely adjustments and avoid maxing out the card limit.
  • Consider requesting your financial institution to increase your credit limit if you have a good payment history.
  • Practise responsible spending habits and try to use debit cards for your more frequent expenses.
  • Try to make multiple payments throughout the month rather than waiting for the statement due date.
Must Read: Check Free CIBIL Score Online (Know How?)


We can conclude that your credit utilisation ratio plays a significant role in shaping your credit score and overall financial health. Understanding this and managing your credit responsibly can pave the way for better financial opportunities and stability. 

At SMFG India Credit, the minimum CIBIL score required for a personal loan application is 750. We offered tailored financial solutions at attractive interest rates starting from 11.99% per annum* for eligible applicants. 

Our 100% online, paperless application process makes it easy to apply for a personal loan from the comfort of your home. To know more about how we can help achieve your financial goals, contact us or visit your nearest SMFG India Credit branch.

* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us


How does the credit utilisation ratio affect my credit score?

Your credit utilisation ratio is a significant factor in determining your credit score or CIBIL score. Having a lower credit utilisation ratio, ideally 30% or below, is an indicator of responsible credit management. A lower ratio may lead to a higher credit score, while a higher ratio can lower your CIBIL score.

How can I improve my credit utilisation ratio?

Paying down existing credit card balances and debts, requesting a credit limit increase, (without increasing your spending), and regularly tracking your balance to ensure it stays well below the credit limit are some ways to help you improve your credit utilisation ratio. These actions can also potentially increase your credit score.

What is the ideal credit utilisation ratio?

While there's no definite number, it is generally recommended to keep your credit utilisation ratio below 30%. However, the lower, the better. Maintaining a low utilisation ratio is considered excellent for your credit score, along with other considerations such as maintaining a timely payment history.

Why is credit utilisation ratio important?

The credit utilisation ratio is crucial because it significantly influences your credit score. Keeping this ratio low indicates responsible credit management, financial responsibility, and stability to lenders, increasing the likelihood of approval for loans and credit cards at favourable terms.

Is it possible to have too low credit utilisation?

Yes, it is possible to have too low credit utilisation. While keeping your credit utilisation low is generally advisable, having no credit utilisation at all may indicate to lenders that you're not actively using credit, potentially impacting your creditworthiness.

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