Five reasons why you should keep utilization of your credit cards low

It is wise to use only upto 30% of the sanction limits and pay within the credit cycle. Under no circumstances should you max out your credit limits.

September 10, 2013 4:20 IST | India Infoline News Service

Credit Card issuing banks are already eager to hand out credit cards and offer spending limits. It is far too easy to utilise the credit limits as there are seemingly easy options of deferred payments. Utilising a high amount or maximum credit limit can have serious consequences. It is wise to use only upto 30% of the sanction limits and pay within the credit cycle. Under no circumstances should you max out your credit limits.


Nisha Zaveri was furnishing her new home. She wanted to ensure that all the electronics in house were the best ones in the market. As she went shopping for them, she found that they were available on “Attractive EMIs schemes”.  Lured by this she started buying and before she knew she had maxed out on the credit limit of all her three credit cards.


Nisha’s troubles had just began she had a lengthy road ahead full of repayment schedules and if she missed out on a single repayment she would bound down with a heavy interest burden.


1. It becomes very difficult to pay the entire money back by due date

Like Nisha, you may have good intentions and hope to pay back the entire amount when your pay check arrives next month. The fact remains that so many aspects of your life need a slice of your pay check. You need to pay your bills or else your services will be cut off. You need to pay for your daily needs – food, transport etc or else you will not be able to function. Your next pay check is largely committed already. So it inevitable that you will not be able to pay the entire amount by due date, putting into a debt cycle where high interest rates pulls you in a vortex.


2. Your Cibil score falls

The ratio of credit card balances to credit limits is known as credit utilization. The ideal credit utilisation ratio is 30%. It triggers an alarm once it goes over 50% and starts lowering your credit score. The closer your spending is to the maximum credit available, the lower your credit score will fall. Even using the maximum credit on a single card will lower your Cibil score.


3. Lenders are wary of it

If you are applying for a loan then the lender will assess the amount of credit that you have utilised. If the credit utilisation is more than 50% of your total credit limit the lenders consider you as a risky customer. They may refuse to give or loan or may hike up the interest rates to factor in the risk.


4. You end up paying very high costs

Maxing out your credit cards also mean you are making the bank and its shareholders very happy. Most people who max out credit limits are unable to repay within the credit cycle i.e. the free credit period. This means you end up paying extremely high interest rates for the outstanding balances. The interest rates vary from 36% -45% and will pile up on your total payout, increasing the burden tremendously.


5. The danger of falling into a debt trap increases

It’s far too easy to fall into a debt trap when you are carrying such debt. The first thing that one needs to do is stop any credit card spends till the debt is totally clear since each spends will attract the hefty interest charges. Also try to pay as much as you can every month, not just the minimum amount due. If you can get an interest free loan from family and friends do repay the credit card debt with that and aim at paying back that person as early as possible.

The author is Co-Founder & Director, CreditVidya

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