Managing credit card limit and credit utilisation ratio

Every credit card issued by a bank has a credit limit, which is the maximum amount the cardholder can avail in a billing cycle. So, if the credit limit is, say, Rs 2 lakh, the cardholder can enter into credit card transactions up to the maximum limit of Rs 2 lakh in a billing cycle (which is usually a month). The credit limit is set by the issuer to exercise control over the expenditure of the cardholder through the credit card. The credit limit depends on the type of card issued and, most importantly, the creditworthiness of the cardholder as assessed by the issuer.

The credit utilisation ratio of a cardholder is as important as the credit limit. If the credit utilisation ratio is high, say 60-80% of the credit limit, the credit score of the cardholder may get adversely impacted. So, if the credit limit is Rs 2 lakh and if the cardholder on an average utilises 60% of this credit limit on a consistent basis, the credit utilisation ratio would be considered too high. A reasonable credit utilisation ratio would be 20-30% of the credit limit, so in the above example, if the cardholder having credit limit of Rs 2 lakh spends on an average Rs 40,000-Rs 60,000 through the card, it would be considered reasonable.

Of course, the cardholder can reduce the credit utilisation ratio by having multiple cards, but increasing the credit card limit and reducing the utilisation ratio through multiple cards is okay as long as it does not lead to default in repayment. Needless to say, any default in repayment drastically reduces the credit score of the defaulter.