Credit Utilisation Impacting Credit Scores: What You Need to Know

Credit utilisation plays a crucial role in determining an individual’s credit score by analysing the ratio of their credit card balances to the credit limits available to them. This is particularly important in the FICO scoring model commonly used by lenders.

Lenders rely on the credit utilisation ratio to evaluate the risk posed by a borrower. A high credit utilisation ratio indicates that a large portion of the credit is being utilised, potentially signalling financial strain or a higher chance of payment default.

On the other hand, a low credit utilisation ratio reflects responsible credit management, which can positively impact an individual’s credit score. It’s generally advisable to keep the credit utilisation ratio under 30 percent to maintain a healthy credit score.

While the exact calculation methodologies of different credit scoring models like FICO are not disclosed, credit utilisation has a substantial influence on overall creditworthiness and accessing favorable loan terms and interest rates. Keeping the credit utilisation ratio low can be beneficial in this regard.

Regular monitoring of credit utilisation and making efforts to maintain a lower ratio can significantly enhance one’s creditworthiness over time. By ensuring timely payments, reducing outstanding debt, and avoiding new credit inquiries, individuals can improve their chances of accessing better loan terms in the future.

Missed payment deadlines can impact credit scores by having the information reported to credit bureaus like CIBIL, where it can remain on the report for an extended period. Therefore, it’s essential to diligently manage credit utilisation to preserve a strong credit score.