Credit Cards: Keep an eye on your card utilisation ratio

With increasing digitalisation, the use of credit cards is growing and banks are offering attractive benefits such as cashbacks, discount coupons and reward points benefits to attract new customers. Many people hold multiple credit cards, especially the co-branded cards that offer rewards on the purchase of air tickets, train tickets, fuel surcharge waivers, etc.

Use cards responsibly

While there are benefits of holding multiple cards, you must use them responsibly. Establish a good credit history with a vanilla card and then add on a couple of premium cards depending on the usage and specific purchases. Before opting for multiple cards, assess the need for selecting a particular card as there is no use in holding two cards that offer similar benefits. If one is a frequent flyer, it makes sense to opt for a co-branded card. Or, if one uses a credit card frequently at a particular retail outlet, the retail outlet co-branded card can be helpful as it can fetch additional loyalty points.

Payment on time

Credit cards give a credit window of around five weeks from the day of spend to the date of the billing cycle. Over that particular period, credit card spend is like an interest-free loan and the total outstanding dues should be paid on time. The monthly payment should at least cover the minimum amount due, which is usually calculated as 5% of one’s balance outstanding, or the sum of all installments, interest/other bank charges and the amount utilised over the credit limit. Rolling credit dues by paying only the minimum amount due is not a good idea as banks charge an interest rate up to 45% per annum for rolling the dues.

Card utilisation ratio

One must keep a tab on the credit utilisation ratio (CUR) which is simply the outstanding balance divided by the total credit limit. Say, if the credit limit is Rs 2 lakh and if the card holder has done purchases (including EMIs) of Rs 50,000, then the card holder’s CUR is 25%. A high CUR can impact one’s credit score and it should not be over 40% for a longer period of time. Splitting expenses on various cards could help in reducing the credit utilization ratio for each card.

However, spending beyond one’s means will lead to financial distress and debt trap. So, one must use credit responsibly, pay on time and avoid late fees by keeping a monthly reminder on the phone or calendar for the due date. In case of any financial crunch, it is better to look at other source of funds such as a top-up loan or even a personal loan as the rates will be lower than those charged by a credit card company.