The Hidden Ratio That Affects the Credit Score

Many people believe that repaying loans or paying credit card bills on time is sufficient to maintain a good credit score. What they are unaware is that there are some hidden tools that the Credit bureaus use to calculate the credit score. Credit utilisation is one such ratio that affects a borrower's credit score significantly.

Credit utilisation is the share of credit a customer has used compared to the total limit available. It is calculated by dividing the outstanding balance on credit cards by the overall credit limit. For instance, if the total limit is 5 lakh rupees and the balance is 1.5 lakh rupees, the usage ratio is 30%.

Credit bureaus, including TransUnion CIBIL, monitor this figure closely. A high ratio can suggest that a customer is relying too much on borrowed money, even if payments are made on time.

Why this figure matters

According to experts, unlike the repayment history, which builds gradually, utilisation can change sharply within a single billing cycle. If the ratio rises suddenly, the bureau records that snapshot before the customer reduces it. A lower ratio is generally seen as healthier, though the exact effect depends on the customer's overall record.

Safe level

An ideal score often considered is around 30 per cent. TransUnion CIBIL advises that keeping spending close to this level is considered safe. Customers preparing for large loans, such as home loans, may benefit from keeping utilisation even lower for a period, since very low usage signals that finances are not stretched.

The timing issue

Many customers assume that clearing the card bill in full each month automatically shows low utilisation. In reality, if the balance is high when the statement is generated, that figure is reported to the bureau. Lenders see the statement balance, not the later payment. This means a disciplined customer can still face a temporary slowdown in score before applying for a loan. The way to avoid this is to pay down large balances before the statement date, not only before the due date.

How to keep utilisation low

The simplest method is to keep spending modestly compared to the available limit. Customers with multiple cards can spread spending across them, which helps both overall utilisation and per-card ratios. Requesting a higher credit limit can also reduce the ratio, but this only helps if spending does not rise after the limit is increased. Closing old cards should be considered carefully, because removing a card reduces the total available limit and can push utilisation higher overnight.