If you are in urgent need of money and your credit card's limit is close to running out, you may consider raising a personal loan instead. Not only does it enable you to fulfil your financial requirements, but it also helps you maintain a high credit score.
Let us understand how this happens.
It is recommended to keep the credit utilisation ratio below a certain threshold, say around 30 per cent. So, when you need more money than this ratio permits, you can get another credit card or raise a personal loan.
For instance, your first credit card's limit is ₹5 lakh, and you have already used ₹3 lakh. Now, you will need another ₹3 lakh.
Instead of exhausting the entire limit of this card and avoiding applying for another credit card at the eleventh hour, you can instead raise a personal loan.
For the unversed, breaching a high CUR leads to a poor credit score.
The credit utilisation ratio measures the amount of credit you use compared to your total credit limit. It’s expressed as a percentage and is key in determining credit score.
It is ascertained by dividing the ‘total credit used’ by the ‘total credit limit’ of the card user. For instance, when your card limit is ₹12 lakh, and you have already used ₹6 lakh, then the credit utilisation ratio (in percentage terms) would be (6/12) X (100) = 50 per cent.
Since a low CUR (around 30 per cent) is essential for a high credit score, it is recommended to raise a personal loan when you need more funds than your credit card permits within a comfortable CUR range.
Alternatively, you can also use multiple credit cards to ensure that the CUR of each card stays within a comfortable range at all times.
For instance, instead of using a credit card's entire ₹10 lakh limit, one can keep two cards and use ₹5 lakh from each. This way, the CUR remains at 50 per cent for both cards.
Although it is higher than the ideal ratio of 30 per cent, it is better to keep the ratio at 50 per cent instead of exhausting the entire limit.
(Note: Remember that raising a loan carries its set of risks)
