Credit utilisation ratio (CUR) is one of the widely discussed terms while discussing credit scores, but most borrowers forget its importance.
Simply put, CUR is the percentage of your total credit limit that you are currently using. For instance, if your credit card limit is Rs 1 lakh and your outstanding balance is Rs 30,000, your CUR is 30 per cent.
CUR is one of the most important aspect that lenders consider while assessing a borrower’s loan application. A high CUR may indicate financial stress or over-reliance on credit, while a low CUR indicates responsible credit usage.
Why Is CUR Important For Loan Approvals?
CUR will directly impact a borrower’s credit score, as it forms a critical parameter in the decision-making process for loan approval. A higher CUR can, thus, pull down the borrower’s credit score, thereby rendering him/her more risk-prone for lenders. Keeping the CUR under 30 per cent can have an opposite effect by increasing the credit score, enhancing the likelihood of getting the loan approved and a favourable rate of interest.
Lenders want to ensure that the borrower is not over-burdened with debt before approving the loan. If CUR is high, this will imply that the borrower is relying a lot on credit for everyday expenses, which raises concerns about his/her capability to repay new loans.
How CUR Affects Various Loans
Personal Loans: Since personal loans are unsecured, lenders take a closer look at the borrower’s habits when deciding on a new loan. A high CUR leads could lead to rejection of the loan application or approval at a relatively higher rate of interest.
Home Loans: A low CUR will prove to be an advantage in large-value loans, such as home loans. Here, a low CUR portrays good management of finances and the ability to service long-term debt.
Credit Card Loans: If you are applying for a top-up credit card loan, your CUR becomes even more critical. Maxing out your credit limit could lead to outright rejection of credit card loans.
Factors To Secure Your CUR
Timing Matters: Your CUR may also change from month to month based on your credit usage and bill payments. The ideal way to enhance your chances of having your loan approved would be when the CUR is at a low level. Pay off your balances before the end of the statement cycle, as this can lower your CUR.
Single Credit Card vs. Multiple Credit Cards: Spread your expenses over several credit cards rather than relying on a single card to avoid high CUR. For instance, using Rs 10,000 on two cards with Rs 50,000 limits each will keep your CUR at 10 per cent compared to using Rs 10,000 on a single card with a Rs 20,000 limit.
Do not Close Old Credit Accounts: While it may seem prudent to close unused credit cards, doing so will reduce your total credit limit. A reduced limit can increase your CUR and hurt your credit score, even if your spending remains the same.
Tips To Maintain a Healthy CUR
Stick To The 30 Per Cent Rule: Keep your CUR below 30 per cent of your total credit limit. Ideally, aim for 10-20 per cent for a stronger credit profile.
Pay Bills On Time: Paying your credit card bills promptly and in full each month can keep your CUR low, thereby eliminating interest charges.
Check Credit Report Periodically: Maintain a CUR history by periodically obtaining a copy of your credit report to see when your account reports are current.
The best aspect of CUR, however, is that is one among the several factors that lenders consider while issuing new credit. Loan approvals have much to do with income stability, employment history, and one’s repayment record. However, a low CUR indicates financial responsibility, which the lender will have a hard time ignoring.
Your CUR is more than just an odd number; it’s a picture of your credit management habits. A low score doesn’t only mean that your credit score will improve, but it will also increase the prospect of loan approvals significantly. The need to understand and manage CUR has become very important because most lenders are now increasingly relying on this while deciding on loan approvals.
