CIBIL: Paid your credit card bill on time, yet your CIBIL score dropped? Many people make this mistake...

Most people think that their credit score (CIBIL Score) only depends on whether they pay their EMIs or credit card bills on time. While that's certainly very important, there's another number that quietly influences your score: the 'Credit Utilization Ratio'.

Simply put, this ratio indicates how much of your total credit card limit you are using. If you spend your entire limit every month, banks consider this a financial risk.

How is this ratio calculated?

The calculation is quite simple. It takes into account the total limit of all your credit cards and the amount spent on them.

For example, let's say you have two credit cards with a combined limit of ₹4 lakh. If you spend ₹1.2 lakh on these cards, your utilization ratio will be 30%. If you spend ₹3 lakh, it will increase to 75%, which is detrimental to your score.

Why does it negatively impact your score?
While your payment history builds up gradually, credit utilization can change drastically in a single month. If you do a lot of shopping in one month and use 80-90% of your limit, even if you pay it off the following month, your score can drop that month. This indicates that you are heavily reliant on credit for your needs.

How much utilization is considered ideal?
Financial experts recommend following the 30% rule. Try to keep your utilization below 30% of your total credit limit. If you are planning to take out a home loan or any other large loan, keeping this ratio between 10-15% for a few months is even better.

Ways to keep utilization low:
Spread your spending: If you have more than one card, don't put all your expenses on a single card. Distribute the spending across different cards.

Increase your credit limit: Talk to your bank about increasing your credit limit. If your limit increases and your spending remains the same, your utilization ratio will automatically decrease.

Don't close old cards: Closing old cards reduces your total credit limit, which can suddenly increase your utilization ratio.

Conclusion
Credit utilization shows how well you manage your finances. If you keep it under control, banks trust you and you can easily get loans at lower interest rates in the future. Remember, simply paying your bills is not enough; it's also important to monitor how much you're spending.

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