Your credit utilisation ratio is a crucial factor that lenders consider when you apply for a personal loan. This ratio reflects how much of your available credit you are currently using and provides insights into your financial health. Understanding the impact of credit utilisation ratio on personal loan approval can help you make informed borrowing decisions and improve your chances of securing the funds you need.
What is Credit Utilisation Ratio?
In simple terms, your credit utilisation ratio is the percentage of your total credit limit that you are currently using. It is calculated by dividing your outstanding credit card balances by your total credit limit and multiplying the result by 100. For example, if you have a total credit limit of ₹1 lakh across all your credit cards and your current outstanding balance is ₹30,000, your credit utilisation ratio would be 30%.
How Credit Utilisation Ratio Affects Your Credit Score
Your credit utilisation ratio is a significant component of your credit score, accounting for approximately 30% of the total score. A high credit utilisation ratio can negatively impact your credit score, as it suggests that you are relying heavily on credit and may be at risk of overextending yourself financially. On the other hand, maintaining a low credit utilisation ratio demonstrates responsible credit management and can boost your credit score over time.
The Ideal Credit Utilisation Ratio
Financial experts generally recommend keeping your credit utilisation ratio below 30%. However, for optimal credit health, it is advisable to aim for a ratio of 10% or less. Let’s consider an example to understand this better:
| Credit Limit | Outstanding Balance | Credit Utilisation Ratio |
| ₹1,00,000 | ₹10,000 | 10% |
| ₹1,00,000 | ₹30,000 | 30% |
| ₹1,00,000 | ₹50,000 | 50% |
As seen in the table above, maintaining a credit utilisation ratio of 10% is considered ideal, while a ratio of 30% is acceptable. However, if your ratio exceeds 30%, it may raise red flags for lenders and negatively impact your credit score. This can affect your credit utilisation loan approval, as lenders tend to view a high ratio as a risk factor.
Impact on Personal Loan Approval
When you apply for a personal loan, lenders assess your creditworthiness to determine the risk associated with lending to you. Your credit utilisation ratio plays a crucial role in this assessment process.
Lower Credit Utilisation Ratio Increases Approval Chances
A lower credit utilisation ratio indicates that you are managing your credit responsibly and are not overly dependent on credit. This perception of financial stability and lower risk can increase your chances of being approved for a personal loan with favourable terms, such as lower interest rates and higher loan amounts.
High Credit Utilisation Ratio May Lead to Rejection
On the flip side, a high credit utilisation ratio can be a red flag for lenders. It suggests that you are heavily reliant on credit and may be struggling to manage your finances effectively. Lenders may perceive this as a higher risk and may be hesitant to approve your personal loan application or may offer less favourable terms.
Strategies to Improve Your Credit Utilisation Ratio
If you find that your credit utilisation ratio is on the higher side, here are some strategies you can implement to improve it:
- Pay down your credit card balances: Focus on reducing your outstanding credit card balances to lower your credit utilisation ratio. Consider setting up automatic payments or making additional payments throughout the month to keep your balances low.
- Increase your credit limits: If you have a good credit history and have been a responsible borrower, you can request your credit card issuer to increase your credit limit. However, avoid increasing your spending alongside the limit increase, as this will defeat the purpose of improving your credit utilisation ratio.
- Avoid closing unused credit cards: While it may seem counterintuitive, closing unused credit cards can actually harm your credit utilisation ratio. When you close a credit card, you lose that available credit limit, which can increase your overall credit utilisation percentage. Instead, consider keeping the card open and using it occasionally for small purchases.
- Use a personal loan for debt consolidation: If you have multiple high-interest credit card balances, consider taking out a personal loan to consolidate your debt. This strategy can help you pay off your credit card balances, thereby reducing your credit utilisation ratio. Plus, personal loans often come with lower interest rates compared to credit cards, making it easier to manage your debt repayment.
Personal loans offered by Airtel Finance can be an effective tool to consolidate your debts and manage your finances better.
Monitoring Your Credit Utilisation Ratio
To effectively manage your credit utilisation ratio, it’s essential to regularly monitor your credit report and keep track of your credit card balances. You can access your credit report from credit bureaus or through the Airtel Thanks app, which provides you with your credit score for free. By staying on top of your credit utilisation, you can make informed decisions and take proactive steps to maintain a healthy credit profile.
Summing Up
Understanding the impact of credit utilisation ratio on personal loan approval is crucial for managing your finances effectively. By keeping your credit utilisation ratio low, you can improve your chances of being approved for a personal loan with favourable terms. Remember to monitor your credit report regularly, pay down your credit card balances, and consider debt consolidation if needed.
If you’re in need of a personal loan, Airtel Finance offers attractive interest rates and a seamless application process. Check your eligibility, gather the necessary documents, and apply for a personal loan that suits your financial needs.
Personal loans offered by Airtel Finance come with competitive rates and flexible terms, helping you manage your finances effectively. Visit the Airtel Thanks App to learn more about your options and apply today.
FAQs
- What is a good credit utilisation ratio for personal loan approval?
Ideally, aim to keep your credit utilisation ratio below 30%. However, for optimal credit health, maintaining a ratio of 10% or less is recommended.
- Can I get a personal loan with a high credit utilisation ratio?
While it’s possible to get a personal loan with a high credit utilisation ratio, your chances of approval may be lower, and you may be offered less favourable terms, such as higher interest rates or lower loan amounts.
- How can I quickly improve my credit utilisation ratio?
To quickly improve your credit utilisation ratio, focus on paying down your credit card balances. Consider making additional payments throughout the month or using any windfall income to reduce your outstanding balances.
- Does closing unused credit cards help my credit utilisation ratio?
No, closing unused credit cards can actually harm your credit utilisation ratio. When you close a credit card, you lose that available credit limit, which can increase your overall credit utilisation percentage.
- How often should I check my credit utilisation ratio?
It’s a good practice to monitor your credit utilisation ratio regularly, ideally once a month. You can access your credit report from credit bureaus or through the Airtel Thanks app to keep track of your credit utilisation and overall credit health.
