Credit score is an important metric used by lenders like banks and financial institutions before lending money. In India lenders use CBIL score to determine your credit worthiness.They lend only when the credit score of the borrower is good. It also affects the eligibility criteria in cases of applying for personal loans or collateral-free loans. So having a good CIBIL score is very important. In this blog let us find how to improve CIBIL score with the help of credit cards.
How do credit cards work? Why to use credit cards?
Credit cards can be used for purchasing and for doing other payments. Banks extend credit say, 3 months' salary for a particular period say 50 days. If the borrower pays within the said period [in our example 50 days ] then, the borrower need not pay interest. But if he defaults then he will be liable for repaying the credit amount along with interest for the whole year.This interest amount would usually be more than the normal rates.
Using credit cards allows you to enjoy extra benefits like cash backs,discounts and many more. Some people use the credit amount to finance immediate cash requirements in their business and repay once they receive their revenues from the particular project or sales.
Ways to improve your CIBIL score:
- Credit Repayments:
First important thing in maintaining a good credit score is timely repayment. Delayed repayments would reduce your CIBIL score.
- Longer Credit History:
It is more beneficial if you have used credit cards for a longer duration. This is because,if you have been using it for a longer duration you would have a longer credit history. This helps the lender to assess the creditworthiness of the individual.So try to use it for a longer duration.
- Credit Utilization Ratio:
This is the ratio of outstanding debt to the total amount of credit. It is usually denoted in percentage. This ratio signifies how much of the credit amount was actually utilized. Higher the ratio higher is this ratio. Higher ratio signifies that you do not have proper management of funds. This can negatively affect your credit score.
It is usually suggested to have a credit utilization ratio of 30% or below.
- How many credit cards a person is preferred to have?
It is usually preferable to have maximum 3 credit cards. The main reason for having more than one card is,it helps us to extend the credit amount available. So we will have to utilize lesser amount in each card. For example, if you have 3 credit cards,where the credit amount from each card is Rs. 25,000. So I now have a total of 75,000 Rs..Your fund requirement is Rs20,000. So utilize Rs. 7,500 from each card[say] which will give a sum of Rs. 22,500. Now you can see, I have just utilized 30% from each card and also my fund requirement of Rs. 20,000 is met.So having 3 cards helps to reduce your credit utilization ratio. However if a person has too many cards it shows that the person has more credit requirement. Also it would become difficult to repay all the amount within time.
Conclusion:
More people get into debt trap and loose their credit score because of delayed repayments. But if the credit cards are utilized in the right way it would become more beneficial. Using credit cards in the right way helps to increase the CIBIL score.
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