For many borrowers, especially those navigating multiple loans or credit lines, credit utilisation ratio (CUR) is a key metric that influences both credit scores and overall financial health. But what is it exactly?
Why is a rate above 30% often considered a red flag by lenders, and how can you bring it down?
In this blog post, we’ll explore how credit utilisation works, the negative impact of a high CUR, and offer actionable steps to reduce your debt burden.
Understanding Credit Utilisation Ratio
Your credit utilisation ratio measures the portion of your available credit limit that you’re actively using. For instance, if you have a total credit limit of $10,000 across all your credit cards and you carry a combined balance of $3,000, your CUR is 30% (3,000 ÷ 10,000). Lenders look at this figure to gauge how reliant you are on credit.
A lower CUR suggests you’re keeping credit usage under control, which in turn signals to lenders that you’re a responsible borrower. A higher CUR can signal potential financial strain, as you’re frequently borrowing closer to (or at) your available limit.
Why Is More Than 30% a Problem?
Many financial experts and credit reporting bodies believe 30% is a key threshold. Exceeding this figure can hurt your credit score in a few ways:
- Perceived Risk: If you use a large portion of your credit limit, lenders may view you as a higher-risk borrower.
- Interest Costs: Carrying a high balance often means paying more in interest each month, increasing debt over time.
- Reduced Approval Odds: Future lenders might be less inclined to offer you additional credit or loans if they see you’re already close to maxing out existing credit lines.
Keeping your CUR under or around 30% is generally considered healthy, although the lower you can go, the better it often is for your credit score.
How to Reduce a High CUR
- Pay Down Balances: The quickest way to reduce your CUR is by making extra payments toward your highest-interest credit cards or loans.
- Request a Credit Limit Increase: If used wisely—i.e., without ramping up spending—this can bring down your ratio overnight. However, be cautious; a higher limit should not be seen as an invitation to spend more.
- Consolidate Debt: A low-interest personal loan or debt consolidation plan can free up existing credit lines, instantly lowering your CUR.
- Avoid Adding New Charges: If your goal is to cut debt, focus on essential spending only, and avoid swiping your credit card for non-critical items.
- Spread Out Balances: If you have multiple cards, consider distributing balances more evenly. This can help keep any individual account from exceeding that 30% threshold.
5 Tips to Manage Debt Repayments Better
Even if your CUR is in good shape, managing debt effectively ensures it stays that way in the long run. Here are five tips:
- Create a Detailed Budget: Track every expense, identify non-essentials, and redirect that cash to your highest-interest debts.
- Automate Payments: Setting up direct debits or calendar reminders prevents missed due dates and keeps your credit report clean.
- Snowball or Avalanche Strategy:
- Snowball: Pay off the smallest debt first for a quick emotional win.
- Avalanche: Tackle the highest-interest debt first to save more in interest.
- Refinance or Renegotiate: If your credit has improved or market rates have dropped, refinancing can cut monthly payments and total interest.
- Seek Professional Guidance: If debt is overwhelming, consider speaking with a financial counsellor or exploring debt consolidation options that align with your income and repayment capacity.
Ready to Improve Your Credit Health?
By maintaining a lower credit utilisation ratio, you not only protect your credit score but also enhance your chances of securing better loan terms. For more details on managing your CUR and debt repayment strategies, explore the [search tool on our site] to find related resources and success stories from borrowers who’ve successfully lowered their credit usage.
Need personalised advice or looking to consolidate your debts? Contact our team at the Australian Lending Centre. We’re here to guide you toward a stable, more confident financial future.
