As of 2023, there are around 86+ million active credit cards in India. This number has been growing steadily over months now. People opt for a credit card because it improves financial health, balances your transfers, gets you easier loans, gives you access to an emergency fund, and, most importantly, improves your CIBIL Score. If you weren’t aware of this – let’s understand how a credit card would enhance your credit score – and all the other factors revolving around it.
What is a Credit Card?
A credit card is a financial offering. It comes with a credit limit for financial aid in emergencies, for sudden spending, and much more. You can swipe the card, where the financial institution that issued the card will pay for your purchase, and you can repay them in full or in part.
Let’s understand this with an example.
You have an SBI credit card. It will work just like a debit card. An SBI credit card will have a credit limit, joining charges, annual charges, sometimes lifetime free, interest rates when you pay in part or the minimum, a helpline number of SBI credit cards, and many more features.
This helps you pay for emergencies, cater to sudden purchases, and much more when you do not have instant cash or enough bank balance.
At times, it also lets you earn cashback and rewards for specific uses. You can use your credit card as a reliable source of cash funding in times of need.
What is the Meaning of the CIBIL Score?
The most known of the credit information organisations that are licensed by the RBI is the Credit Information Bureau Limited. Reserve Bank of India has also licensed three more companies to operate as credit information companies. Experian, Equifax, and Highmark are the three companies. The CIBIL score – on the other hand, is the most popularly used credit score in India. Let’s look into what a CIBIL score is.
CIBIL Limited keeps credit records on 600 million people and 32 million enterprises. TransUnion, an American multinational corporation, owns CIBIL India. As a result, credit scores in India are referred to as the CIBIL Transunion score.
How Does a Credit Card Affect your CIBIL?
Credit cards can make an affect on your CIBIL in the below-mentioned ways:
1. Repayment history of the card
You must know how and when to repay the borrowed amount while using a credit card. For example, if you pay the entire amount on time, your credit score will improve. However, your credit score will be impacted if you fail to pay on time. Defaulting on credit card payments will have a higher negative affect on your credit score than late payments. Remember that your repayment history affects your credit score significantly, so repay what you borrow promptly.
2. Time period of holding the card
If you’ve had a credit card for the last five years or so and haven’t used it much, you’ve probably thought about cancelling the account. That may not be the ideal option because the duration of your credit history is a significant element in calculating your credit score.
A credit card that has been active for a long time provides more information about your credit history than one that has only been active for a few months. Let’s imagine you didn’t know how to utilise your credit card at first and ended up falling behind on your payments for the first two months.
However, you quickly realised your error, and your payment history has been immaculate in the years thereafter.
A creditor will consider lending to you in such circumstances because they know your credit conduct has improved over time. As a result, your CIBIL score will rise. Contrast this with a credit card you’ve had for a few months. Even one single missed payment can have a significant influence on your CIBIL score.
3. Ratio of credit limit utilisation on your card
The credit utilisation ratio is another aspect considered while determining your credit score. But what exactly is it? In essence, your credit utilisation ratio is computed by dividing your entire outstanding debt by the total credit available to you. The resulting value is shown as a percentage. How does credit usage affect credit score? It is usually best to maintain your credit usage percentage under 30%. Failure to do so has an adverse effect on your credit score.
4. The number of credit cards you hold
On the one hand, having many cards helps. It helps to increase the amount of credit available to you, lowering your credit usage ratio. On the other hand, having too many credit cards can harm your credit score. As a general guideline, you should keep no more than three credit cards active at any given time. Too many credit cards might lead to repayment difficulties, lowering your credit score. Furthermore, it may imply that you require excessive credit to get by.
5. Frequently applying for credit cards
Creditors check the applicant’s credit report from the credit bureaus before approving a credit card or loan application. This type of inquiry is known as a hard inquiry, and it lowers your credit score. As a result, only apply for a credit card when you really need one. Furthermore, lenders avoid credit profiles with several credit card accounts because they believe it is a sign of desperation. Instead of applying for many credit cards at varied banks, use the one you can manage the most efficiently and that best meets your needs.
Conclusion
If you think you are maintaining your credit cards, be glad you are heading on the right path. A well-maintained credit card also means a well-maintained CIBIL and better financial being for your future. Also, when you have a good CIBIL, you will not have to worry about sudden financial emergencies in the future.