Understanding Credit Utilisation Ratio

Whenever you open your credit card statement or your net banking account, the term “maximum limit” will flash before you at least once. Most of us regularly check the maximum limit on our credit cards to see how much more we can spend with them. This limit, known as the maximum credit limit of the card, represents the maximum amount you can borrow on the card from your bank. 

The credit utilisation ratio is a concept that floats in the premise of the credit card. We will understand here what the credit limit utilisation ratio is in this article and how it can impact borrowers and their credit scores. 

What is the Credit Utilisation Ratio?

The credit limit utilisation ratio is the percentage of the total monthly credit limit that you utilise. This credit utilisation percentage or ratio is a prominent factor considered by the AECB when calculating the credit Score of individuals in the UAE. 

This ratio goes up whenever you use your credit card to make a purchase and comes down when you pay your credit card bill. Maintaining an ideal credit utilisation ratio can help you improve credit scores as well. 

How Does Credit Utilisation Ratio Work?

The credit utilisation ratio takes the amount of debt you are utilising at the moment out of the total revolving credit amount sanctioned for your card by your bank. When we say “debt you are utilising”, we refer to the total unpaid balance on your credit card here. 

This means that your credit limit utilisation ratio will remain unchanged if you carry forward the debt to the next month instead of paying it in full. Interest will apply to the unpaid amount of the previous month(s). This is why credit card debt is known as revolving debt. 

If you have more than one credit card, your credit limit utilisation ratio will be calculated as per the total combined limit of all the cards and the total combined debt amount for them all. 

Credit Utilisation Ratio Calculations 

To calculate your total credit limit utilisation ratio, take all your credit cards and check the due amount or outstanding balance on each of them. Add up the outstanding balance of all credit cards and add up the total limit of all these cards. Now, you can divide the total debt by the total credit limit of all cards and multiply the result by 100. The resulting number will be your credit limit utilisation ratio in percentage. 

Let’s understand it through an example:

Mr. X has 3 credit cards. He owes AED 2,000, AED 2,000, and AED 500 on his three cards for August. The total limit of the cards is AED 10,000 each. 

The credit limit utilisation ratio of Mr. X for August would be as follows – 

Credit Card 1 Debt = AED 2,000

Credit Card 2 Debt = AED 2,000

Credit Card 3 Debt = AED 500

Total Debt = 2,000+2,000+500 = AED 4,500

Total Sanctioned Monthly Credit Limit = 10,000+10,000+10,000 = AED 30,000

Credit Utilisation Ratio for August = (4,500/30,000) * 100 = 15%

Mr. X’s total credit utilisation ratio is 15% for August. 

Several credit utilisation calculators are available in the UAE that you can utilise to quickly calculate your credit limit utilisation ratio. You will need a few things to use online credit utilisation calculators like your total debt due and your total sanctioned credit limit. Keep in mind that some calculators may require you to enter the due amount and the total credit limit for each credit card separately. 

You can find a suitable credit utilisation calculator as per the data you wish to provide. You can then easily create a credit utilisation chart using one of the available online calculators. 

How Credit Card Utilisation Impacts Your Credit Score?

How Does Credit Utilisation Ratio Impacts Credit Scores?

As mentioned above, credit limit utilisation ratios play a rather important role in the calculation of credit scores. Banks and financial institutions gather data about your credit utilisation and send a periodic report to the AECB, with most creditors reporting your credit behaviour to AECB monthly. 

Four major factors impact credit score calculations in the UAE – bill payment history, credit utilisation ratio, credit history, and types of credit accounts. Of this, the credit utilisation ratio has a weightage of 30% in credit score calculations. Maintaining a healthy credit utilisation ratio, thus, results in a comparatively higher credit score. 

Will Closing My Credit Account Impact Credit Utilisation Ratio?

Closing your credit account may impact the credit utilisation ratio if this particular account has been inactive for a long. Most people believe that closing an inactive account should not impact their credit utilisation ratio at all. However, when you have multiple credit accounts and close the ones that you do not use, the credit limit utilisation ratio increases. 

This is because the total debt you were utilising previously was divided by a higher total credit limit for the month. With one credit card closed now, the total limit decreases but the expenses remain the same. This increases the credit limit utilisation ratio and impacts your credit score as well.  

What is a Good or Healthy Credit Utilisation Ratio?

Finance experts and most credit monitoring bureaus recommend keeping your credit utilisation ratio below 30%. So if your total credit limit is AED 10,000, for instance, you should ideally spend no more than AED 3,000 in a particular month, given that you pay off the due balance on time. 

While there is an ideal suggested number for credit limit utilisation ratio, this does not mean that you can never exceed it even when the situation requires it. It is acceptable to exceed the suggested limit, although it would be in your favour to not make a habit out of it. 

Should You have a 0 Credit Utilisation Ratio?

Not utilising your permitted revolving credit at all should be avoided just like maxing out of the credit card. 0 credit utilisation also harms your credit score indirectly, although not as much as using more than the suggested credit utilisation limit can. 

Not using your credit card may lead to the closing of the account by the bank due to inactivity. This decreases your credit limit and increases the credit limit utilisation ratio for other credit cards you have, which, in turn, may lead to a decreased credit score. 

How to Manage Your Credit Utilisation Ratio?

The following are a few small things you can do to improve your credit utilisation ratio:

• Pay your credit card bill in full every month. Carrying forward your due balance month on month not only blocks your credit limit but also increases the interest amount. 
• Open a new credit account if your credit limit utilisation ratio is not within the suggested percentage. This will help you increase the total allowed credit limit for all your accounts. 
• Request your issuer to increase the credit limit for your current credit card 
• Keep your current unused credit accounts open 
• If you tend to use your credit card frequently, consider making multiple payments. This will help in reducing the credit limit utilisation ratio and also allow you to use your card as much as you like. 
• Use your credit card like a debit card or even cash. If possible, pay for all your purchase made using a credit card the same day to free up the credit limit and eliminate the chances of debt accumulation. 

Understanding Credit Score Rating Scale in the UAE

The Final Verdict 

Understanding and managing your credit limit utilisation ratio is one of the best things you can do for using your credit cards properly as well as improving your credit score. It is more about juggling the ratio to make it fit your spending style instead of moulding your spending style according to it. 

Simply follow the aforementioned tips to manage your credit limit utilisation ratio like a pro. You can also take assistance from our in-house financial experts regarding this subject or any other finance and insurance-related query.