Do you spend your entire credit card limit every month? Know its big loss

Do you spend your entire credit card limit every month? Know its big loss

Credit experts suggest that people should keep the credit utilization rate around 30%. A low credit utilization rate means that the person is managing his card correctly.

Know what is the loss of spending full credit limit.

Are you one of those people who spend the entire credit card limit every month? It may happen that you spend your money, swipe all the money from the card, but it may also have to bear a big loss. There can be a problem in getting a home loan. It may take some time to process your application.

Understand this with an example. Suppose Hemant spends his credit card limit every month. By the end of the month, they swipe the entire amount of the card. This will make it easier for them to run the expenses, but it can be difficult to get a loan. If you want to take a home loan, then Hemant may have to make several rounds of the bank. The reason for this is that the credit utilization rate is high in the credit report. This happens because Hemant spends up to 100% of the credit limit every month. Hemant will not be aware that what is the loss of spending credit limit.

There are many other people like Hemant who must be facing this kind of problem. Let us know what is the way to avoid this.

What is credit utilization rate

Credit utilization rate or ratio is the amount that we use on the credit card. Divide this amount from the credit limit. It is often shown in percentage. Suppose Hemant has two credit cards with a limit of Rs 1,00,000 per month. Hemant spends Rs 95,000 every month. Accordingly, the credit utilization ratio became 95 percent.

Problem with 95% ratio

Suppose Hemant has applied for a home loan in a bank. His EMI is being made of Rs 50,000 and his monthly salary comes to Rs 1.5 lakh. If Hemant spends Rs 95,000 every month on his credit card, he will be left with Rs 55,000 for other expenses. For the bank where Hemant is applying for home loan, he will be considered at credit risk as he spends the entire credit limit. In such a situation, the bank will assume that Hemant can face trouble in paying the EMI.

What should be the credit utilization rate

Credit experts suggest that people should keep the credit utilization rate around 30%. A low credit utilization rate means that the person is managing his card correctly. It also shows that your finances are being managed properly. Such persons are less trapped in the debt trap and their credit score is also good.

How to Improve Credit Utilization Rate

1.For this, spending on credit cards will have to be reduced. Credit cards should be swiped only when necessary. Like for phone bills or fuel payments.

2.For this, you can take different credit cards and divide your expenses. This will help in maintaining the credit utilization rate up to 30%.

3.It should also be noted that more credit cards should not mean that there is more spending.

4.If you want, you can ask the bank to increase the credit card limit. This will reduce the credit card utilization rate. It should also be kept in mind that do not spend so much that the credit utilization rate increases.

5.If you cannot reduce the spending on the credit card, then try to pay the bill twice a month. This will reduce the monthly credit utilization rate and improve the credit score.