Credit utilisation explained

What Is Credit Utilisation?

Credit utilisation refers to the amount of your available revolving credit that is being used at a particular point in time. For a credit card, it is commonly expressed as a percentage of the card’s credit limit.

For example, if a credit card has a credit limit of ₹1,00,000 and the outstanding balance is ₹30,000, the utilisation based on that balance would be 30%.

How Is Credit Utilisation Calculated?

Credit utilisation can be expressed using a simple ratio between the amount of credit being used and the total available credit limit.

For example, if the total credit limit is ₹2,00,000 and the reported balance is ₹50,000, the utilisation is 25%.

The calculation can be considered for an individual credit card as well as across multiple revolving credit accounts, depending on how the credit information is reported and assessed.

Why Is Credit Utilisation Important?

Credit utilisation is one of the factors that may be considered when assessing a person’s credit profile. A high reported utilisation can indicate that a significant portion of the available revolving credit is being used.

Credit scoring models can use different factors and methodologies, so utilisation should not be viewed in isolation. Its effect can vary depending on the overall credit profile and the scoring model being used.

Credit Utilisation on One Credit Card

When you have a single credit card, utilisation can be viewed by comparing the reported balance with that card’s credit limit.

For example, a card with a ₹1,00,000 limit and a reported balance of ₹20,000 has a utilisation of 20%. If the reported balance increases to ₹80,000 while the credit limit remains the same, the utilisation becomes 80%.

Overall Credit Utilisation

When a person has multiple credit cards, utilisation can also be considered across the available revolving credit limits and reported balances.

For example, suppose two cards have limits of ₹1,00,000 and ₹2,00,000, giving a combined limit of ₹3,00,000. If the combined reported balance is ₹60,000, the overall utilisation based on these figures is 20%.

The way credit information is considered can vary between credit bureaus and scoring models.

Statement Balance and Reported Utilisation

The balance used for credit reporting may not always be the same as the balance you see at another point in time. Credit card balances can change as purchases, payments, refunds, and other transactions are processed.

As a result, utilisation can vary depending on when the balance is reported. The exact reporting process and timing can differ between issuers and credit bureaus.

Does a Higher Credit Limit Reduce Utilisation?

A higher credit limit can reduce the utilisation percentage when the amount of credit being used remains unchanged.

For example, a ₹50,000 reported balance represents 50% utilisation on a ₹1,00,000 limit, but the same ₹50,000 balance represents 25% utilisation on a ₹2,00,000 limit.

However, credit limit changes are subject to the issuer’s eligibility and assessment criteria and should not be considered solely in terms of their effect on utilisation.

Credit Utilisation and Multiple Credit Cards

With multiple credit cards, each card can have its own utilisation as well as contributing to overall revolving credit utilisation. One card may have a high utilisation while the combined utilisation across all cards may be lower.

Credit reports can contain information from multiple credit accounts, and the way this information is incorporated into a credit score depends on the applicable credit bureau and scoring model.

Credit Utilisation and Credit Score

Credit utilisation can be one of several factors considered in credit scoring. Other factors may include payment history, length of credit history, credit enquiries, and the types of credit accounts in a person’s credit profile.

Because scoring models differ, there is no single utilisation percentage that guarantees a particular credit score or outcome. A credit score should therefore be understood using the broader credit profile rather than one factor alone.

What Can Affect Credit Utilisation?

Credit utilisation can change as your credit card balances and limits change. Common factors include:

• New purchases on a credit card
• Payments made toward outstanding balances
• Refunds or reversed transactions
• Changes in credit limits
• Opening or closing revolving credit accounts
• Balances reported by credit card issuers

Conclusion

Credit utilisation describes how much of the available revolving credit is being used and is commonly expressed as a percentage of the credit limit. It can be considered at the individual card level as well as across multiple credit accounts.

Utilisation is only one part of a broader credit profile, and its effect can vary depending on the credit bureau and scoring model. Understanding your credit limits, reported balances, and payment history can provide a clearer picture of your overall credit profile.