In the time of COVID-19, many companies have cut their salaries, even announcing layoffs during the lockdown. Besides, self-employment has also been affected. There is a problem with the cash of many salaried people. Fearing an increase in default, many credit card issuers have carefully reduced the credit limit on the card. If your credit limit has also decreased during April and May, it can affect your credit score. The credit bureau that oversees individuals' credit scores checks different parameters for assigning credit scores to a person. One such important parameter is the credit use of the person. In fact, credit use is the ratio of outstanding credit on the total credit limit available on all issued credit cards.
Industries experts say the credit score has a 20-30% weightage in credit score. According to experts, people who use more credit cards often reduce their credit score, as it shows that the person is eager to spend money. So, if you've recently noticed a reduction in your credit limit, it will increase your credit use ratio, and it is likely to affect your credit score. Understand this like this... Suppose you had a credit limit of Rs 3 lakh before COVID-19, and from that limit, you used only Rs 50,000. So your first ratio of COVID-19 was 16.66%. However, in May, your bank has reduced the credit limit on your card from Rs lakh to Rs 80,000, but your outstanding credit is still Rs 50,000. In this case, your credit usage ratio will increase to 62.5%.
The understanding here is that in April and May, many banks have reduced the credit limit on their credit cards by 90%. According to experts, credit usage of less than 30% is good for your credit score. But if your credit usage ratio goes up to 50%, lenders look at it negatively. If your credit limit has been reduced recently, you should repay some of your credit card loans to make your credit usage ratio less than 30%.
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