Decoding Your Credit Card Usage: The 30% Credit Ratio Rule

When it comes to credit health in Singapore, one metric stands out: credit utilisation. Simply put, it's the ratio of your current credit card balance to your credit limit. The Credit Bureau Singapore (CBS) meticulously tracks this, factoring it into your CBS score — a crucial number that influences your eligibility for everything from personal loans to mortgages.

To calculate your credit utilisation, start by adding all the outstanding balances, divide it by your total credit limit and multiply by 100 to get a percentage. For instance, if your credit limit is S$10,000 and your balance is S$3,000, your utilisation is 30%.

“What is the 30% credit rule?” is a question many ask, and it is often cited as a rule of thumb. Keeping your utilisation below this threshold is generally considered a healthy practice, signalling responsible credit management to lenders.

In Singapore's lending landscape, credit utilisation is a crucial indicator of your financial health. Lenders use it to gauge your responsibility and potential risk. High utilisation can raise red flags, impacting your chances of securing loans or new credit cards. Getting a free credit score check can help you stay on top of this.

How much of my credit limit should I use?

Keeping your credit utilisation below 30% is generally considered a healthy practice, and here’s why: Lenders view this as a sign of responsible credit management. It suggests you're not over-reliant on credit and can manage your finances effectively.

For example, with a S$10,000 credit limit, aiming for a balance of $3,000 or less can positively impact your CBS score. This demonstrates disciplined spending habits, improving your prospects for loan and credit card approvals. In practical terms, this means better interest rates, higher loan amounts, and easier access to financial products in the future.

On the contrary, high credit utilisation exceeding 30% can raise concerns for lenders. It may suggest financial overextension, potentially lowering your CBS score and hindering your ability to secure loans or credit cards.

Lenders might perceive you as a higher risk, which could lead to higher interest rates or outright rejection of loan applications. In Singapore's competitive property market, for instance, a lower CBS score due to high credit utilisation can significantly affect your ability to secure a favourable mortgage.

Is 0% credit utilisation a good thing?

While having a zero balance might seem ideal, it's not always optimal for improving your CBS score. It can indicate a lack of credit usage, potentially leading to a lower score due to inactivity. Lenders in Singapore want to see a track record of responsible credit management. A completely inactive credit card doesn't provide any evidence of this.

Plus, Singapore's financial institutions value seeing responsible credit management. A 0% utilisation rate might suggest you're not demonstrating your ability to handle credit effectively. Lenders want to see that you can manage credit responsibly over time. Regular, moderate credit card usage, followed by timely payments, builds a positive credit history, which is essential for accessing favourable financial products.

How credit utilisation affects your CBS score

In Singapore, the CBS considers credit utilisation a significant factor in your CBS score, which ranges from 1000 to 2000. Your utilisation rate can directly influence your standing. A lower utilisation rate generally results in a higher score, indicating lower risk to lenders. This leads to the question of how much will lowering credit utilisation affect score, and the answer is it depends on the starting point, but generally lowering it will increase the score.

It's important to remember that credit scores are multifaceted. While credit utilisation is a key factor, it's not the only one. Other factors include payment history, length of credit history, and types of credit used.

If you're consistently using a significant portion of your available credit, consider requesting a credit limit increase from your bank. A higher limit with the same spending reduces your credit utilisation ratio, potentially boosting your CBS score.

However, it's crucial to use this strategy responsibly. Don't increase your spending just because you have a higher limit. Only request an increase if you can manage the higher limit responsibly. Knowing what is a good credit utilisation ratio is key to making this decision. The best credit utilisation ratio is generally considered to be below 30%.

What’s next?

Stay informed about your credit health. Access your free credit score and report through SingSaver. Understand the factors influencing your score and take proactive steps to maintain a healthy credit profile.

By regularly monitoring your credit utilisation and making timely payments, you can build a strong credit history, which opens doors to better financial opportunities in Singapore. Take control of your financial future by understanding and managing your credit utilisation effectively.