How Credit Cards Impact Credit Score?

Credit cards have become quite common today. Thanks to the government which is constantly pushing digital economy, cashless payment systems like mobile wallets, mobile banking, and credit/debit cards are now used by a large number of people. This is because they can use the cards to shop online, avail discounts and cashback perks, build credit score, and more. However, there are certain risks with the cards too.

The way you use your credit cards has a huge impact on your credit rating. So, if you are not careful, then the rating can go down really fast. To prevent that from happening, you must understand the following points:

1. Payments

Your credit card payments have the biggest impact on your credit score. If you are frequently late with the clearance of the bills, then it can have an adverse effect on your rating. This is because payment history makes the biggest contribution in your credit score.

Many people think that if you are late with the payments in a particular month or two, then it can’t make a big difference in your score. However, that’s just a misconception. In reality, every single payment matters. This is why it’s strongly recommended that you create a budget and use your cards wisely. Use only as much credit as you can repay without running into problems. Controlling your expenses can also prevent a situation in which you become a loan defaulter.

2. Credit Utilization Ratio

Credit utilization ratio is the ratio of the amount of credit you use with your cards and the combined limit on the cards itself. Let’s take an example to make it easier to understand.

Let’s say that you have two credit cards and they have a credit limit of Rs. 1 lakh each, which means that the combined limit is Rs. 2 lakhs. Now, if you are spending an average amount of Rs. 70,000 a month with the cards, then the credit utilization ratio can be calculated as:

Credit utilization ratio: 70,000/2,00,000 = 35%

In this example, the ratio is 35% which is slightly above the recommended value which is 30%.

The reason you want a lower credit utilization ratio is that the banks consider a high ratio a sign of “credit hungry” behavior. What it means is that when your ratio is high, then it signifies that you aren’t able to pay for your expenses on your own and need help from your cards. This is a bad sign and also suggests a potential loan defaulter in the making.

If you don’t want your credit rating to hurt from high credit utilization, then you should control your expenses as soon as possible. One way to do that is to avoid paying for luxuries and focus on your necessities.

3. Credit Report Discrepancies

Although not directly related to credit card usage, mistakes and typos in your credit report related to the credit card related activities in the past can also hurt your rating. This is because the card issuers may sometimes send erroneous data to the rating agencies. To avoid these mistakes from ruining your score, try to check your report every once in a while and contact the card provider if you find any.

Did you know that you can obtain one free credit report at least once per year? According to the new directives shared by the Reserve Bank of India, all credit rating companies have to provide the users with one report every year. So, you qualify for a free one if you haven’t obtained it yet. In case you already have, you pay a small fee and get an updated version too. Either way, you should get updated report every few months, or rather every month if possible.

Conclusion

As you can see, credit cards may have their uses but they must be used responsibly. If you are not careful, you can end up damaging your credit report so much that it becomes a herculean task to bring the score back to normal range. So, use the information shared above wisely and prevent a disaster from taking place in the first place. Good luck!

What are the possible credit solutions for those without any credit history?

 

Your credit score can make a critical difference to your financial health. It impacts your ability to get finance on the best terms, be it a car or home loan, or even a personal loan to fund the vacation of your dreams.

What is a CIBIL score?

A credit score is a three-digit numerical representation of your credit report that is an indication of your creditworthiness. When a lender evaluates your application for credit, they rely on this information to take a decision. A higher score typically results in better terms of credit.

Unfortunately, having a low CIBIL score is not out of the ordinary but the fact remains that with some effort, you can turn your credit score around and ensure that your financial future isn’t impacted. At the other end of this spectrum are people who do not have any credit history, which also puts them in a similarly difficult position to get a loan or card at competitive interest rates.

Building credit history

If you’re new to using credit or currently have a low score owing to a shaky credit history, don’t worry, it’s not time to hit the panic button yet. With some diligence and monitoring you too can achieve and maintain a good credit score to secure your financial future.

Let us take a quick look at the factors which affect credit history:

Now that you know which factors impact the credit score, here are some hacks to help you build a solid credit history:

• Check your credit report – The first step to get you started is to call for a copy of your credit report from a credit bureau. There are currently four credit bureaus in India. Do go through your report carefully to ensure that all the data mentioned therein is accurate. Check that the account information pertains to you, and if you notice any errors, bring them to the attention of the concerned bureau immediately. This will ensure that your credit history is not only accurate but will also protect you against identity theft. If you have no credit history, there may not be much information in your report, but whatever there is, needs to be checked for accuracy.

• Apply for a credit card – When you don’t have any credit history to build on, the best way to begin is to get yourself a credit card. However, be warned that falling into a debt trap is easy when you have credit at hand! Make sure, therefore, that you don’t delay payments. Instead, make them in a timely manner and ideally in full, so that this card starts to reflect positively on your credit report. Use this to your advantage to build the first blocks of a solid credit history.

• Apply for a secured credit card – It’s possible that a credit card issuer may be unwilling to issue a card to a first-time user without any prior credit history. In such an instance, it is possible to approach your bank for a secure credit card, which is typically issued against collateral such as a fixed deposit. The limit on such cards will be capped at a certain percentage of the deposit if you have no or a low CIBIL score. This is a good way to build a robust credit score over time.

• Apply for an add-on credit card – If the above two solutions are not feasible, you could consider requesting a family member (parent, sibling or spouse) to apply for an add-on credit card. With this card in your name, you will start to build a score. Do keep in mind that your financial habits will reflect on the credit report of the primary card holder, and vice versa. So, do use this tool judiciously in order to build a robust score.

• Apply for a consumer loan – Another way to obtain a credit solution without any previous history is to opt for a small ticket consumer loan, to purchase any white goods such as a microwave oven or even a mobile phone. Make sure you repay EMIs in a timely manner because this will then be one of the best and quickest ways to establish a good score.

Tips for good credit behaviour

Sometimes, it takes credit to build credit history. Become financially responsible and display good credit behaviour in order to be able to get finance when you really need it the most. When your financial habits are responsible, your credit history gets a solid foundation and you can get further credit including a personal loan with relative ease.

Once you have established a credit history, make sure that all your payments are made in a timely manner and in full. This is not just a good habit to form, but it also helps with maintaining a robust credit score in the long run.

With the above tips and tricks, get started on your healthy credit journey today!

Why Banks Give Easily Loans for Credit Scores Ranging from 750-900?

The ultimate goal of every lender, whether it’s a traditional bank or an NBFC, is to maximize profits and minimize costs. Since loans make for a good part of their portfolio, they take a variety of measures to check associated risks.

How do Banks Assess Loan Applications?

The banks consider several factors when they review loan applications. These are:

Credit History

Credit history is your history with previous loans, credit cards, and other forms of debt. Some of the things that hold a lot of value in terms of risk assessment, is whether you have ever defaulted on a loan in the past, or were late with payments, etc. However, if you are applying for a business loan, then the bank may also check the credit history of the business profile.

Collateral

Collateral helps a bank balance the risk-reward equation, especially when the loan amount is high. This is because when they attach a property, stocks, gold, etc. to a loan, then they have the option to claim the rights to these if you are unable to or refuse to repay the loan in the future. They can then sell these off to get their money back.

Debt-to-Income Ratio

Debt-to-income ratio is the percentage of your net monthly income that’s spent on monthly debt payments viz. home loan, personal loan, credit cards, etc. Naturally, if the ratio is high, then it means that you will have a hard time accommodating another loan and it may become a reason for the lender to turn down your loan request.

Nature of Application

When you apply for a loan individually, then the risk is higher compared to a joint application. So, if you are applying for a loan with a co-applicant, such as your spouse, then you can expect the bank to give approval rather easily. In fact, it’s not uncommon for married couples to apply for home loans together.

Role of Credit Score

While the factors above certainly play a big role in the loan process, the most important thing that matters to a lender is your credit score or CIBIL score. But why is that?

A credit score is basically a numerical representation of your creditworthiness. So, if a bank has to approve a loan, then they can check your credit score to predict how likely you are to default on the loan. This simplifies things and makes loan processing faster and easier.

What’s the CIBIL Score?

CIBIL stands for Credit Information Bureau (India) Limited. It’s one of the biggest credit rating agencies in India which maintains and updates the credit details of millions of users across the country.

CIBIL follows a scoring range of 300-900 which means that the lowest and highest score that you can achieve is 300 and 900 respectively. However, no bank expects a borrower to have a perfect score of 900. Most of them just want you to have a score from 750-900.

Why do Banks Easily Approve Loans for Credit Scores Ranging from 750 to 900?

As mentioned above, banks check various factors when evaluating loan applications. However, the CIBIL score summarizes all these factors and make it easier to make a calculated decision. So, if someone has a good score i.e. above 750, then they are likely to be a good candidate for a loan.

The following are some of the reasons why banks easily approve loans for high credit scores:

• Applicants with a high score can be expected to clear their loans on time

• High-score applicants are also likely to pay their EMIs on time without fail

• Chances of defaulting are quite low among applicants who have a good credit score

Bottom Line

Your credit score is more important than you think. While it certainly influences your loan applications, it can also change the interest rates you get from the lenders or the maximum loan amount that is permitted for you. So, be sure to get a copy of your credit report online as soon as possible. You can get one completely free if it’s your first one in a particular year. Besides, the process is pretty much straightforward and simple.