Many of us stay away from credit cards fearing their negative impacts on our credit scores. This article will detail what are credit or “CIBIL Scores”; How they are calculated and especially how credit card usage affects it.
The different ways credit card usage affects these score are discussed in a Question and Answer format.
What is a Credit Score (CIBIL score)?
Credit Bureaus like CIBIL, Experian, Equifax etc. maintain a credit score for individuals. The score is a number between 300 to 900. A high score means you are good at returning the debts that you take. It improves your chances of getting loans from financial institutions.
Having a score above 800 is considered excellent and a score above 750 is good enough in most cases.
The last time at SBI I was told the interest rates charged for Personal Loan increased as per the following tiers
Best interest rate for loans is given for scores > 750
0.5% extra is charged for scores > 730
Even higher (don’t remember) is charged for scores < 730
What are the factors that affect a credit score?
Factors which affect a credit score in descending order of importance are as follows:
a) Payment History: If in the past you have missed any payment(s), or especially recently if you have missed a payment the credit score drops significantly. The score can drop by more than 100 points too.
b) Amounts Owed or credit Utilization ratio: If you are using the full limit given on the credit card, it is considered bad for your credit score. They think you might be quite close to your breaking point.
c) Length of credit history and average credit history: If you have a Home Loan since many years and are paying diligently you are considered more credit worthy. This also means if you have recently taken many new loans or credit cards, your score might drop a little.
d) Credit Enquiries/ New Credit: Most of the times you apply for a credit card, the company will check your credit score. Such enquiries by banks and financial institutions will cause your credit score to drop and are known as “Hard enquiries”. When you check your own score, they are “soft enquiries” and don’t affect the score in any way. Only the last three months’ enquiries are used in the score.
e) Credit Mix: Different types of credits such as home loans, credits cards, car loans etc are considered good for the score.
Credit cards and Credit Scores
We try to answer here the most common questions in relation to credit cards here.
a) Taking a Credit card for First score generation
The credit score of a person who has never taken credit is 0. This means they won’t be eligible for loans as they have a “Bad” credit score. They won’t be eligible for most credit cards too. So taking a secured credit card or any credit card is a good strategy to generate your credit score account.
b) Enquiries to get new credit cards reduce you credit scores.
This is true, but the negative effect is only 10-15 points. Additionally, the effect of enquiries only for the last three months is considered for credit score generation. So after three months your score will be back to the original value.
c) Paying the minimum on credit card will not affect your credit score
False, paying minimum due is considered as a “missed payment” and will reduce your credit score.
d) Hold Many credit cards so that your credit utilization remains low
This is an excuse I tell myself when I apply for my next credit card. If you are using more than 30% of the credit card limit, it adversely affects the credit score. Consider asking for a limit increment on the present credit card or get another card so that the average credit utilization gets lower.
e) Should I close my oldest credit cards?
Closing an old credit card will reduce your score. It will make your average credit age go down. I personally feel that we should not be so cautious, and should close the card account if we are not using the card.
f) Having too many credit cards affects the score.
I have 10 credit cards. I also have a CIBIL above 750. Just don’t miss payments. The rest you don’t need to fret.
DO ask more questions in the comments.
Ways to check your credit scores for free
There are multiple channels by which you may check your credit scores for free. However, most of them involve sharing your information like contact number, etc. There is a good chance you will be bombarded with spam calls. You have been well cautioned.
1) CRED: Using this mobile application, you can access your Experian and CRIF scores once a month.
2) OneScore: Using this mobile application, you can access your Experian and CIBIL scores once a month.
3) BankBazaar: You can access your Experian score once a month. This sends the invite to the maximum spam calls.
4) CIBIL website: You can buy plans for getting your credit score updated from the respective websites at a fee (Rs 500-1000).