Credit scores play a significant role in the ability of a credit-issuing firm or a bank to assess an individual’s eligibility for a loan or credit card. TransUnion CIBIL, or CIBIL, as most people recognise, is India’s credit information company. All the information regarding your loan and credit cards is recorded by TransUnion CIBIL.
So, how do credit cards affect your CIBIL score? Well, the participating banks and credit institutions supply the information to CIBIL in the form of credit limits/high credits. This information helps in generating Credit Information Reports (CIR) and credit scores. The financial institutions share the customer information with CIBIL on a monthly basis.
Know Your Credit Score
Your credit or CIBIL score enables your potential lender to gather all of your credit information and put it together. When requested, CIBIL provides the Credit Information Report along with the CIBIL score, which usually ranges between 300 and 900, where 750 is seen as the minimum score for approvals.
How is The CIBIL Score Calculated?
The CIBIL score is calculated based on several factors, including:-
- Firstly, your repayment history makes up 35% of the score, so it's crucial always to make timely payments.
- Credit consumption accounts for 30% and looks at your total sanctioned credit and credit utilised.
- The duration of your credit (15%) and balance of credit (10%) also play a role.
- Lastly, inquiries for new loans make up the remaining 10%.
Leveraging Credit
Improving your credit score is crucial, and understanding your CIBIL score is just the beginning. Once you know where you stand, it's essential to take steps to enhance your score. Using a credit card is a simple way to boost your CIBIL score. Still, it can lead to problems if you accumulate debt carelessly.
However, suppose you use your credit card to pay monthly utility bills like water, gas, electricity, and telephone bills. In that case, you can positively impact your CIBIL score, as these bills are relatively cheaper and easier to repay.
It's also crucial to make prompt repayments on your credit card bills, even if it's just the minimum amount. These small yet effective strategies can serve as a stepping stone to improving your credit rating.
Ways in Which Credit Cards Affect Credit Score
Now that you have set sail, the most critical task of all is to improve your CIBIL score and not let credit cards affect your credit score. Besides ensuring timely repayment, here’s what you should do:
- Applying for Credit Cards Frequently: Applying for several credit cards in a short period might damage your credit score since creditors may interpret it as financial instability.
- The Problem of Plenty: Having too many credit cards dampens your CIBIL report because the sum of all the credit limits/high credits, as reported by issuers to the bureau, results in a high unsecured to secured loan ratio.
- Maintaining a High Credit Utilisation Ratio: Consistently using a substantial amount of your credit cards' available balance might have a negative influence on your credit score.
- Unsecured Loans: Having no secured loans is also a drawback for pretty much the same reason, which is that it leads to a high unsecured-to-secured loan ratio.
- Minimum Due: Don’t let the minimum due of your credit card bills fool you because the lenders will still charge interest on the total amount that is due.
- Delayed Repayments: Missing repayment due dates are recorded in your credit history and can affect your credit score.
- Closing a Credit Card Account: Surprisingly, closing a credit card affects CIBIL scores, but not in a good way. This step can reduce your average account age and affect your overall available credit, affecting your score.
No Credit History? No Worries!
If you haven’t applied for a credit card or a loan previously, you may not have any credit score or credit report in your name. Not having a credit score can sometimes be a hindrance. Although unfair, this is the norm because to prove that you are capable enough to repay your credit, you first need to initiate a history.
But this shouldn’t discourage you because there are ways of instigating that history: prepaid credit cards and a line of credit are 2 ways. Prepaid credit cards or secured credit cards are a good start.
Freo’s (Formerly MoneyTap) personal line of credit, with its user-friendly features, can be your way to raise credit scores. Use it judiciously for a year and see your credit score improve.
FAQs
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Does having multiple credit cards affect your credit score?
Having many credit cards does not affect your credit score. What is actually important is how you handle your cards and make on-time payments. Whether you have two or twelve credit cards, failing to pay your payments on time can lower your credit score.
Conversely, if you routinely pay off your accounts before the due date, your credit score improves. Surprisingly, having additional credit cards typically results in a greater overall credit limit.
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Does closing a credit card affect CIBIL score?
When you close a credit card, it can have a negative impact on your score because the bureaus no longer have access to that specific line of credit information or behaviour. This results in the removal of the associated credit history, reducing its overall length and contributing to lowering your score. So, yes, closing a credit card affects CIBIL scores for sure!
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Does EMI on credit cards affect CIBIL score?
Don't worry! Using your credit card's EMI option has no negative impact on your CIBIL score. In fact, it's a wise decision to make sure you pay off your debts on schedule each month in a more manageable manner. This can assist in enhancing or maintaining your credit score in the long run.
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How many credit cards are too many?
There isn't a magic number for determining how many credit cards are too many. Instead, consider the benefits and use of your present credit card before opting to obtain a new one from any bank or organisation.
When applying for a new credit card, you should evaluate the credit limit, annual fees, and bonuses. To preserve financial health, keep your credit utilisation low and pay your bills on time. Remembering these factors have a significant influence on your credit score!
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Do multiple credit cards affect your credit score?
Having several credit cards can have both positive and negative effects on your credit score. The impact largely depends on how effectively you handle those cards. Regardless of the number of credit cards you possess, remember to keep your balances low and consistently pay your bills on time.
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How does your repayment history impact your credit score?
Your credit history demonstrates how effectively you have kept up with repaying borrowed funds on time. If you have a track record of making on-time payments on loans or credit cards, your credit score is likely to be strong.
