How to use multiple credit cards smartly

Managing your credit cards is tricky. On one hand, it’s hard to keep track of how much you have spent in a month and you only know when you have the statement in your hands.

On the other hand, spending too little may mean you may have to pay annual charges that may be otherwise waived off with regular use, and you may also not be able to enjoy the rewards and cashback your cards may offer.

There are two other aspects to using credit cards. One is the matter of the credit utilisation ratio, and the other the matter of your credit score, which decides whether you are considered worthy of a loan. 

What Is CUR?

Credit Utilisation Ratio (CUR) is the per cent of your available credit limit that you are utilising. For example, if you have a spending limit of Rs 100,000 on your credit card, and if you use Rs 70,000 of that limit in a month, your CUR is 70%.  This ratio reveals how much of your available credit is used every month.

Now, you may think that as long as you’re spending within your limit, you’re fine. This is not true. On the contrary, your heavy credit card usage would reveal you as someone in frequent needof short-term unsecured loans. To a bank or an NBFC looking into your credit history, you would appear to be a credit-hungry person constantly in a cash-crunch — even if that is not actually true. An actual credit-hungry person would take on too many loans, fail to manage his finances properly, let his debts spiral out of control, and default on his payments. 

How to use credit cards wisely?

It is wise to keep your credit card spending under control, preferably at more than 30% of your limit. You could use the card to extract the most out of your available rewards without appearing to be credit-hungry. You should ideally meet all your other expenditure using your debit card or cash. If you have multiple credit cards, it is a good situation to be in. It presents an opportunity for you to further reduce your CUR.

Assume you hold two credit cards. You have a spending limit of Rs 100,000 each on the cards. Your total available spending limit is therefore Rs 2,00,000. Assume that you spend Rs 50,000 using both cards. Your total CUR on both cards is 25%. But if you were to spend the whole amount of Rs 50,000 from one card, your CUR on that card would be 50%. This is too high. But your CUR on the other card is 0%. You could split the Rs 50,000 equally on both cards. This would bring down your CUR on each card to 25%, which is an acceptable level.

How CUR impacts credit score?

Credit utilisation can form 30% of your credit score. Should you keep exceeding that threshold, it would help bring down your credit score. This, in turn, would make it harder for you to access loans from banks and NBFCs. If you do get a loan, it is likely that you will be charged a higher interest rate than someone with a better credit score.

If you require high volumes of credit, and if you’re unable to pay your credit card bills for any reason, it would further reduce your CIBIL score. You must try and stay within the 30% limit at most times. Occasionally exceeding it, will not be calamitous, but exceeding it frequently reveals a habit of spending beyond your means. As a long-term money management habit, this is bad for you.

Secondly, if you think you would frequently exceed the 30% threshold, it may be a good idea to simultaneously split your expenses among multiple credit cards. As an added measure, you could also ask your card provider to increase your spending limit. Lastly, to have a healthy credit score, your credit history should reveal that you are able to pay off a mix of short and long-term loans.

Credit card payments are the former. Always repay your credit card bills in full and don’t settle for the minimum payment. This would ensure that your repayment track record shows you in good light any time your credit history is scrutinised while applying for a loan or a credit card. Having a credit card is a privilege which must be exercised judiciously. Use it well and it would help you reap reward points, discounts, and cashbacks.

(The writer is CEO at BankBazaar.com)