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How does the Credit Utilization Ratio impact your borrowing power?
by Saurabh Sharma Finance BloggerAn impeccable financial history reflects positively on the credit history of the company. In the intricate world of personal finance, where credit plays a pivotal role, understanding the nuances of factors that influence your borrowing power is essential. One such critical factor is the Credit Utilization Ratio. It is a metric that defines the financial credibility of an individual. A higher Credit utilization ratio negatively impacts your credit score and report, which indirectly impacts your borrowing power
What Is the Credit Utilization Ratio?
It is a percentage of your available credit. The credit utilization ratio highlights the credit limit you have used. It is calculated by dividing the balances of the credit card is divided by the credit limits and then multiplying it by 100.
Credit utilization ratio = (Total outstanding on all credit cards / Total credit limit) X 100
For example, if you have two credit cards that have a limit of Rs. 50,000. The outstanding balance on one card is Rs. 25000, while on the other card, it is Rs.2000. The Credit Utilization Ratio is calculated as follows:
Rs.25,000 + Rs.2000/ Rs. 50000 *100= 60%
It means you have used more than half of the credit limit available to you. It can be calculated for individual cards. This is called the card ratio.
A good credit utilization ratio may vary from one lender to another. However, it is recommended to keep it below 30%.
Understanding Your Borrowing Power
Before exploring more details on the credit utilization ratio, we will be focusing on what is borrowing power. The latter refers to the extent of credit that one can access based on one's financial history. It includes credit score and credit history. The lenders use this matrix to identify the creditworthiness of an individual.
How Credit Utilization Ratio Impacts Your Borrowing Power
The credit utilization ratio directly impacts the borrowing power of an individual. The higher grade utilization ratio negatively impacts the credit score and thus influences the boring power of an individual. Conversely, having a lower credit utilization ratio has a positive impact on the finances. Thus, influencing the credit score positively showcases your adeptness in managing your credit and finances, thereby bolstering your credit score. A high credit score not only reflects your financial responsibility but also empowers you to secure additional credit lines, thus amplifying your borrowing power.
Borrowing Power: A Total of All Your Sources of Income and Debts - Your Debts From Your Income.
Managing Credit Utilization Ratio for Optimal Borrowing Power
Pay Your Bills on Time
One of the easiest ways to manage your credit utilization ratio is to make the payments on time. Timely bill payments reflect positively on your financial health. It showcases that you have good creditworthiness. Moreover, it also prevents the ratio from spiraling upward. In addition, paying your debts on time is imperative.
Regularly Check Your Credit Utilization
Many a time, you may overlook the credit utilization ratio. However, it is recommended that periodic checks of the credit utilization ratio can give you a glimpse of whether you are managing your finances well or not. It also helps in making necessary adjustments, thereby preventing you from overspending.
For example, if you have a card with a credit limit of 25,000 credit and you owe 5,000 on that card, then the formula to calculate the credit utilization ratio is 5,000 / 25,000 = .2x 100 = 20%.
Spend Within Your Limit
One of the easiest ways to manage your credit utilization ratio is to spend within your limit. Although it may feel a luring to spend up to your credit limits, it can adversely impact the credit utilization ratio. Being a responsible spender can help you keep a check on this ratio.
Increase Your Credit Limit
In case you need to spend more, you can send a request to increase the limit. However, this step must be taken cautiously to prevent yourself from overspending.
Open a Balance Transfer Credit Card
It is highly recommended to check the interest rate offered on the card. In case you notice that the credit card you are using offers a higher interest rate, you can manage the credit utilization ratio by transferring the balance towards a card with a lower interest rate. It helps in consolidating the debt, thus helping you improve the credit utilization ratio.
Consider Applying for a New Credit Card
While not a decision to be made lightly, applying for a new credit card can increase your overall credit limit, subsequently reducing your credit utilization ratio.
With these basic tips, you can manage the credit utilization ratio easily. It helps in improving the credit score and enhances the borrowing power of an individual. However, lenders favour individuals who are responsible borrowers. Thus, it assists in quick loan approval.
Conclusion
Managing your finances is an art, and the credit utilization ratio is a potential influencer that impacts your creditworthiness. A judicious understanding of how this ratio intertwines with your borrowing power empowers you to make informed decisions about your finances.
By prudently managing your Credit Utilization Ratio through timely payments, responsible spending, and strategic credit decisions, you can pave the way for a higher credit score and enhanced borrowing power.
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About Saurabh Sharma 
Finance Blogger
1 connections, 0 recommendations, 8 honor points.Joined APSense since, March 31st, 2023, From Faridabad, India.
Created on Oct 23rd 2023 02:12. Viewed 93 times.
