As per Business Insider India, Indians spend 1.8x more using credit cards than debit cards by utilising the 45–48 days interest-free credit. The use of online credit card payment methods for purchases is much more attractive with cashback, reward points, etc. However, credit card payments are a kind of debt with a high interest charged on it after the billing period is over. If the bill is paid as per schedule, no interest is charged, and if the minimum due amount is paid on time, the credit is not considered overdue and can be paid off with interest. The way individuals manage their credit card payment schedules has a high impact on their credit history.
Credit Card Payments and CIBIL Score
A CIBIL score is a numeric value between 300 and 900, which is a summary of one’s credit utilisation and repayment habits. The higher the score, the more reliable one is to a lender. The score also factors in the types of credit exposure one has had, the length of exposure and the borrowing habits.
Credit card transactions get recorded in credit history and the pattern of utility bill payments, credit card payments, etc. become a part of this. Therefore, efficient or inefficient use of credit cards impacts the CIBIL score. A good CIBIL score is essential for quicker approval of loans and lower rates of interest. Therefore, one must maintain a disciplined credit card use pattern.
How Does a Credit Card Impact a Credit Score?
Credit cards come with the temptation of purchasing articles now and paying for them later. Naturally, a lack of disciplined usage creates a cycle of overdue credit card payments and late charges. All these become a part of one’s credit history and hence impact their CIBIL score. Here is how a credit card is bad for a CIBIL score:
#1. Having a very high credit utilisation ratio
A credit utilisation ratio is the amount of credit utilised divided by the available credit limit. If one uses a very high percentage of the credit limit available to them (say 70–80%), it indicates an inability to organise spending habits and an over-reliance on debt. Hence, it ends up affecting the CIBIL score adversely. Therefore, recklessly making credit card payments to buy things might not be a good idea and one must plan their spending.
#2. Not paying the minimum due amount
Not completing credit card payments as per the billing cycle is another way of spoiling the CIBIL score. Repayment history constitutes nearly 30% of the CIBIL score; hence, it is a bad idea to miss credit payments.
#3. Too many credit cards
Having multiple credit cards is usually helpful in making the best use of offers on the market; however, applying for many cards at the same time creates an impression of mismanaged spending habits.
How to Improve CIBIL Score Using Credit Cards?
Despite the infamy, credit cards can significantly aid in strengthening the CIBIL score if used in a disciplined manner. Here are some of the things one must keep in mind if one wants to make the best use of credit cards and at the same time improve their CIBIL score immediately.
#1. Length of credit history
There are times when one has some pending debt and there are times when one does not. Having credit cards helps one maintain a long credit history. This in turn has a good impact on the CIBIL score as lenders lay high value to customers with evidence of reliable credit management.
#2. Maintaining a low credit utilisation ratio
A credit utilisation ratio of 25–30% is an indicator of fairly good credit exposure without too much reliance on it. Going too high shows over-dependence on credit card payments, and not using it will lead to the card being closed out. If one has no borrowing history and zero credit card usage, the CIBIL score could even be 0 as there is no information about the credit history.
#3. Making prompt bill payments
Repaying bills on time is extremely good, both for financial health and a good credit score. It ensures that one does not pay hefty interest payments on credit card debt and forms nearly 30% of the CIBIL score.
#4. Not making multiple new credit applications in a short time
Making too many new credit card applications in a very short period of time could lower the CIBIL score. It is good to have multiple credit cards as one’s overall credit limit increases and maintaining the credit utilisation ratio becomes easier. However, the application for the cards should be done in a staggered manner. Having multiple open inquiries for credit cards makes one appear credit hungry.
#5. Activate autopsy
Nowadays, all credit cards offer the convenient facility of activating auto-payment of credit card dues. This facility enables hassle-free bill payments without having to continually track the payment schedules of multiple cards.
Using credit cards while following the above recommendations will help improve one's CIBIL scores immediately.
Summary
In a nutshell, credit card payments could be a boon or a bane for one’s CIBIL score. One must understand the impact of credit cards on credit profiles and use them accordingly to give a boost to the CIBIL score. This means planning spending, making timely bill payments and maintaining a good credit utilisation ratio. This does not mean that one should stop making credit card payments altogether, which could have a negative impact on the length of credit history. You can opt for one of the Tata cards which come with various offers and auto payment options to help manage credit payments better. The key is in finding the right balance between using credit cards and not overusing and over relying on them.
So next time, do not be guilty while making a credit card payment online to avail a massive discount on something that you need to buy – just ensure that the bill is paid in time.
14 June 2023
5 mins read
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