How to use your credit card limit smartly to boost your credit score

Credit cards, if used optimally, offer at least a one-month interest-free credit period. However, what is crucial is the pattern in which you use your sanctioned credit limit. Before going into other details, let’s first understand what the credit card limit is and how it is decided.

**What is the credit limit? **

In case of credit cards, the credit limit is the borrowing limit extended by your card issuer. It is the maximum amount you are allowed to borrow on a particular card in a billing cycle.

Factors taken into account for deciding your credit limit

For deciding your starting limit against your credit card, financial institutions look at factors such as your income, credit history, existing loans, repayment history as well as debt-to-income ratio (DTI ratio).

Debt-to-income ratio is a metric used by financial entities to ensure your creditworthiness and decide whether to lend you additional money and at what rate of interest.

Generally, a lower DTI ratio is considered to be good, as lenders and other credit card issuers categorise you as low-risk borrowers.

Ravi Singh, MD, Airmoney Services is of the view that credit cards are a great tool for building your credit score, but only if you use them sensibly. A simple habit like not using more than 30–40% of your limit and paying your dues on time can make a big difference.

Over time, that consistency really helps strengthen your credit profile. At the same time, features like interest-free period and EMI options do give you flexibility in managing expenses, he added.

He also noted that people usually go wrong when they carry forward balances. Interest rates on credit cards are quite high, and once that starts adding up, it can become difficult to get out of. The ‘spend now, pay later’ mindset also leads to unnecessary spending. Add to that charges like late fees or annual fees, and it all builds up. Most importantly, even a small delay in payment can pull down your credit score and affect your chances of getting loans later.

Explaining how credit card limit usage directly impacts your credit score, CA Yogesh Birla, Director, Birla WP Management Co., said, credit utilisation ratio (CUR) becomes a determining factor for your credit score to a certain extent. It is always suggested to take credit cards with higher limits, so your utilisation ratio remains lower and lower CUR is always good to ascertain better credit score.

For example you have credit card spending of ₹1 lakh in a month, if you have a credit card with limit of ₹2 lakh, then your CUR at the end of the month will be 50%, wherein if you put efforts and convince your bankers to issue you a credit card with ₹4 lakh limit, then your CUR comes only at 25%, so just little efforts brings better credit score and make you eligible to get better credit reports.

Birla added that another way to lower the CUR is by paying off a portion of your due balance, before your credit statement is generated. This can reduce the balance reported to credit bureaus and just after the statement is generated, you can again use credit limits.

Further if you are using multiple credit cards, then instead of using one credit card to the maximum and getting reported for high credit utilisation in that bank, you may use multiple credit cards to lower your credit score. In standard banking practices, CUR between 25% to 30% is considered positive for your total CIBIL score, he said.

Using credit card limits to higher CUR signals to lenders that you are credit hungry or financially overspread, which can cause your score to drop, even if you pay it on time. Wherein, maintaining a low CUR demonstrates responsible management and helps boost your credit score.