Why Should you Check your Credit utilization before Applying for Personal Loan?

When assessing your loan application, lenders check on your CIBIL Score that helps them decide the status of your application. While applying for a loan has now become easy, getting one has become difficult owing to stringent regulations followed by banks and financial institutions in India. Your CIBIL Score constitutes to be one of the important determinants of your credit behavior that represents your credit history, repayment behavior, credit utilization among other factors of your credit profile.

Having a high CIBIL Score helps one get a high amount loan at a low-interest rate, whereas a low CIBIL score can get you a low amount at a high rate or lead to rejection of the application altogether. Out of various factors that have an impact on your credit factor, your credit utilization ratio plays a significant role in determining your credit worthiness. If you have a general understanding of credit utilization then you would know what it is and how it can have an impact on your credit score. If not, then read this article to know all about the importance of credit utilization when applying for a personal loan.

What is Credit Utilization?

In simple terms, credit utilization refers your credit card usage i.e. the overall amount of outstanding balance you hold on your credit card. It also means the money you owe on all your credit cards divided by the sum of all your credit card limits. For instance, if you hold 5 credit cards with overall limit of 2 lakh and you have spent 1 lakh money on all of them then your credit utilization comes to 50%. The ratio constitutes your overall credit card debt and is not limited to usage of only one card.

What is a good Credit Utilization Ratio?

The rule of thumb is to keep your credit utilization up to 30% of your overall credit limit. Using more than 30% of your credit limit each month indicates that you are heavily dependent on the card to finance your monthly essentials and lifestyle. A high ratio makes the lenders wary of this fact which can turn out to be a strong reason for them to reject your loan application. Using more than 30% limit in a monthly billing cycle could lower your credit score even if you pay off the bills on time. On the other hand, having zero credit utilization means zero credit history which means you give lenders no insight of how you deal with borrowed money. Not using credit card helps them gain no idea of your repayment behavior which can be one of the reasons for low CIBIL Score and rejection of the loan application.

How you can determine your Credit Utilization Ratio?

You can determine your credit utilization doing the following:

  • Calculate the limit you have on all your Credit Cards
  • Calculate the balances that you have on the Credit Card
  • Divided the total balances by the total limit that you hold

How you Credit Utilization can impact your Credit Score?

Your credit utilization can vary each month due to which so can your credit score. There is a strong correlation between credit utilization and credit score as a high ratio can lead to a low credit score, whereas a low utilization ratio can help you increase the score. Even if you make the credit card payments on time and keep a low utilization ratio, but the same may not reflect in your credit report unless the credit card issuer does not report the payment made to the credit bureau. It is important for you to know that credit card companies report to the credit bureaus only once in a month i.e. at the end of the billing cycle. So, if you pay off your balances earlier, then the same would not be reported to the bureau immediately which can lead to a low credit score. It is important that you keep this in mind when applying for a loan or credit card as a high ratio can lead to instant rejection of the application.
How to improve credit utilization ratio?

You can look to improve your credit utilization ratio by doing the following:

  • Reduce the amount of money you utilize from your credit card each month
  • Request the credit card company to increase your credit limit balance
  • Pay off your credit card bills twice in a month or pay the balance before the end of the Billing Cycle


Maintaining a low credit card utilization is important if you are looking to get a personal loan or a credit card. You can also use a personal loan eligibility calculator for personal loans to check your eligibility before applying for a loan with a lender. Remember, a rejected loan application can dent your credit score which can make it difficult for you to secure loan in the future.