Know How Your Credit Utilisation Ratio affects your CIBIL Score

The importance of having a good CIBIL score cannot be emphasised enough when it comes to availing of loans. This 3-digit number plays an enormous role in determining the creditworthiness of an individual during loan application, irrespective of the financial product applied for. Knowing how to get a CIBIL report and checking it at regular intervals will let you manage the score properly.

In CIBIL score calculation, a factor that often holds precedence over others is one’s credit utilisation ratio. This ratio represents a comparison between the utilised credit amount against the total credit limit. Hence, individuals should know how it can affect their credit ratings and work accordingly to avoid such issues.

Credit utilisation ratio and its effects on CIBIL score

This ratio represents the inclination of a borrower to spend and how he/she utilises the available credit limit. It refers to a credit system that allows individuals to borrow repeatedly within a pre-defined limit while paying a portion of it. A credit card is a prime example of it.

On the other hand, the debt-to-income ratio represents an individual’s fixed monthly obligation against his/her per-month income. Therefore, individuals with a high ratio are perceived as high-risk borrowers. Even if their income can support regular repayments, lenders will consider them as prospective defaulters. In such cases, their loan application may get rejected, consequently leading their credit score to drop, as well.

Usually, financial experts suggest that individuals should keep their credit utilisation ratio within 50%, as it reduces their chance of payment defaults. The easiest way to manage this situation is through constant monitoring and careful planning of expenses.

Borrowers can also apply for a higher credit limit to keep this ratio in check.

For instance, you have a credit card with Rs.50,000 limit, and you regularly spend about Rs.30,000. Thus, your credit utilisation ratio will be 60%. But if you increase this limit to say Rs.1 lakh, it will become 30% of the total available credit amount.

Therefore, managing the ratio, alongside other pointers to improve the credit score, can increase the eligibility of a borrower to avail external funding without any hassle. Individuals can find the reflection of their improved credit score on their credit report.

How is the credit utilisation ratio calculated?

As mentioned above, the credit utilisation ratio represents the amount of available credit when divided by the credit utilised. A point to remember here is that this ratio is expressed in percentage. Here is an example –

You have Rs.1 lakh available credit at your disposal, mainly through your credit card. From that amount, you have already spent Rs.60,000. It means your credit utilisation ratio is Rs.60,000/Rs.1 lakh X 100 = 60%.

A step-by-step guide on how to get a CIBIL report

CIBIL stands for Credit Information Bureau India Limited. It is one of the oldest credit rating agency operating in India and is in charge of preparing credit statements and assigning credit scores to Indians.

Here is a guide on how to get this report and check your CIBIL score –

Step 1: Visit CIBIL’s official website and create an account by registering your email ID and contact number.

Step 2: Complete the account setup by providing personal information like date of birth, address, ID proof details like Aadhar card number, or PAN details.

Step 3: Verify these details via OTP.

Step 4: Receive your credit report and score.

Access to this report allows individuals to evaluate their financial position and apply for a loan accordingly. Leading financial institutions  special emphasis on meeting the required CIBIL score parameter to qualify for secured or unsecured funds.

With its long list of benefits, the company also extends pre-approved offers to eligible customers. Borrowers can quickly check their pre-approved offers online by providing their name and contact number.

A recent survey has reflected that only 52% of borrowers are aware of their CIBIL score and its importance. But, being aware of how to get a CIBIL report helps individuals learn about their current financial situation and plan their future activities accordingly.

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