Understanding Credit Utilisation Ratio

What is the Credit Utilisation Ratio?

Credit utilisation ratio, sometimes simply called the credit utilisation, refers to the percentage of total credit you are currently using against the total available amount. It is an essential factor because it can drastically impact your credit score. It also helps them decide whether to issue you more credit.

For instance, assume that you have a credit card with a total limit of AED 200,000. If you have currently used AED 100,000 out of it, your ratio or credit card utilisation rate is 50%. 

A lower rate is seen as a positive indicator by lenders. It shows that you are using available credit smartly, which shows you as more responsible. A higher ratio, meanwhile, indicates that you are relying heavily on credit — this makes it harder for the bank to give you more credit. 

How Does Credit Utilisation Ratio Work in UAE?

Your credit utilisation is impacted by the amount of debt on your revolving credit accounts. Here are the types of revolving credit accounts that are taken into account —

• Credit cards
• Personal lines of credit
• Credit card with your name as an authorised user
• Any closed revolving account with outstanding balances

Credit Utilisation Ratio Calculations 

It’s important to know how to calculate the credit card utilisation rate to ensure you always have a stable line of credit with lenders. Here are the steps to calculate the credit utilisation ratio —

• Step 1: Identify all your revolving credit accounts and their credit limits. 
• Step 2: Add all your revolving accounts' balances and the credit limit. These two numbers will be used to calculate the credit utilisation ratio. 
• Step 3: Divide the total balance on your revolving credit accounts by the total credit limit. Next, multiply the result by 100 to get a percentage. 

Here’s the formula: (Total Credit Used/ Total Credit Limits) × 100

Example of Credit Utilisation Rate

Let’s say you have two credit cards with limits of AED 50,000 and AED 100,000, respectively. One of the cards has a spending of AED 40,000. The other has a spending of AED 50,000. 

In this case —

• Total Credit Limit = AED 50,000 + AED 100,000 = AED 150,000
• Total Credit Used = AED 40,000 + AED 50,000 = AED 90,000
• Credit Utilisation Ratio = (Total Credit Used / Total Credit Limits) × 100
    = (90,000 / 150,000) × 100  = 60%  

Understanding Credit Score Rating Scale in the UAE

How Does Credit Utilisation Ratio Impact Credit Scores?

Your credit utilisation can significantly impact your credit score. Let’s understand how — 

• Your overall utilisation impacts your credit score. If you have maxed out on all your cards, it shows you as an irresponsible borrower. This can bring down your credit score.
• If you manage most cards well but have a very high utilisation on any particular card, it can still hurt your score. This, again, shows that you cannot manage your debts well and rely too much on one particular source. 

Since your credit utilisation indicates how much debt you have used, it is usually considered for calculating your credit score. 

 

How Credit Card Utilisation Impacts Your Credit Score?

What is a Good Credit Utilisation Ratio in UAE?

Ideally, it’s advisable to have a credit utilisation ratio of 30% or below for a good credit score in the UAE. Such a low ratio shows that while you can manage debts, it’s not like you’re using them to fund even your basic expenses and living paycheck-to-paycheck. This shows you favourably to lenders and credit bureaus, which increases your score and gives you better financing opportunities.

Should you have a 0 Credit Utilisation Ratio?

Not really! 

As with everything finance, the answer lies in a balanced approach. If you don’t need debt, you don’t necessarily have to take it on just to boost your score. In such a case, a zero credit utilisation ratio can be acceptable. 

However, if you are looking to borrow, don’t drop the plans just because you think it will hurt your score. You don’t need to worry if your credit utilisation rate is, say, 10 or even 20%. As long as it’s below 30%, you’re good to go. 

How to Manage Your Credit Utilisation Ratio in UAE?

Taking care of small things and developing cautious habits can go a long way. Here are some of the top ways to manage your credit utilisation ratio —

1. Pay off Your Balance on Time

Make sure you pay your dues on time, as this reduces your outstanding debts and improves your credit. It’s also important to note that you must pay at least some part of your bill before your due date. Generally, credit card issuers may report your account's balance at the end of the statement period and then send you the bill, which is due several days later. This can often reflect as a high utilisation rate even if you pay your credit card bill in full.  

1. Request an Increase in the Credit Limit

You can ask your card issuer or lender to increase your credit limit. This is especially true if you have made payments on time and have been holding the card for a while. An increase in your limit can increase your total credit and reduce your balance, thereby decreasing your credit utilisation rate. 

1. Apply for a New Line of Credit

A new line of credit increases the total available credit, thereby reducing spending and the utilisation rate. However, this process can also affect your credit score, so you must be cautious.

1. Settle Your Old Credit Accounts

Make sure there are no outstanding dues on the closed credit account. A closed account with an outstanding balance can increase your spending and, in turn, the utilisation ratio. This also impacts the credit score in the long run.

1. Do Not Close Your Credit Card Accounts

Even if you have credit cards that you don’t use, keep them open. The credit limits of these cards add to the total credit limit, which keeps your credit utilisation ratio low. In fact, this also increases the total age of your credit history, which can further boost your credit score.

FAQs About Credit Utilisation Ratio?