“Interest on debts grow without rain.”
Yes, borrowing money…it’s really easy. It’s repaying the borrowed money which is difficult. That nice shiny plastic card of yours called a “credit card” is a debt bomb. You keep swiping it for all that shopping….It’s a great feeling. The real problem comes, when you are presented with the credit card statement. This is a simple summary of how you’ve used your credit card, for a billing period. Your credit card statement shows an enormous bill, which is looking quite difficult to repay.
Then a tempting thought….Why not run away without repaying the credit card dues? A great idea, but for a simple institution, which can make you pay for this foolish adventure. Credit Information Bureau of India Limited, popularly called CIBIL, collects and stores data on your past repayments in banks, on any loan/credit card. This information is shared with all banks in India. Sure, you could escape paying your credit card dues….but if a few years later, you really badly want that home loan, don’t be surprised if banks turn you away.
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Cibil score is a three digit numeric summary of your credit history. Your cibil score ranges from 300 to 900. You get a cibil score, derived from your credit history. Your entire credit history is found from your credit information report, popularly called CIR. This is nothing but your entire loan/credit card repayment history, across banks and financial institutions in India, over a period of time.
Credit card is simple….borrow now, pay later. But you have to make your repayments in time. Do you postpone paying your credit card dues? You’re in real trouble. Late payment and defaults on your credit cards, has a very bad impact on your cibil score. About 30-35% of your cibil score depends on your repayment history.
Tip: Make sure you repay the credit card dues on time.
This must be very complex for you to understand….but it’s really quite simple. Do not use your entire credit limit…. The amount of credit you utilize (amount you borrow/spend on your credit card) vis-à-vis the amount you can borrow on your credit card (credit limit), is called credit utilization ratio. Let’s say your credit card, has a credit limit of INR 1 Lakh a month. This credit limit is derived, depending on your income and certain other factors. Just because you are eligible to use INR 1 Lakh a month, does not mean you must use it. Credit utilization is very important for a good credit score. Keep it as low as possible. About 30% of your cibil score depends on credit utilization.
Tip: It is generally believed that the ideal credit utilization ratio is 30%.
You have borrowed and made repayments on your credit cards, regularly for two years. Your friend has borrowed and made repayments on his credit cards, regularly for a year. You have borrowed and made repayments for a time period, longer than your friend. Borrowing on your credit card for a higher length of time and making repayments regularly, could give you a higher cibil score than your friend, who has only borrowed and made repayments regularly for a year. Higher the amount of time you have borrowed and made repayments regularly on your credit card, better would be your cibil score. The amount of time for which you have used credit, accounts for 15% of your cibil score.
Tip: Maintain a good repayment record.
You love credit cards. You have availed five of them. You just love to flaunt your credit cards around. Lenders simply hate this practice. Banks view you as credit hungry….banks think you cannot manage money. Every time you apply for a credit card, your bank runs a credit check on you. If the bank finds too many inquiries, (you have applied for a lot of credit cards), your cibil score goes down. This accounts for 10% of your cibil score.
Tip: Have more than 2 credit cards? Try closing them down.
Have you only availed a credit card? Do you have any other loans? Availing only credit cards is a bad idea. You should ideally have a mix of both secured and unsecured loans. A loan backed by some collateral/guarantee is a secured loan. A credit card is not backed by any collateral. This makes it an unsecured loan. You should ideally have a mix of both secured and unsecured loans. Having the right mix, (secured loan: unsecured loan), rather than just availing credit cards (only one type of credit), is a good idea. Credit mix accounts for 10% of your cibil score.
“Rather go to bed supperless, than rise in debt.” Knowing how to calculate cibil score on credit card is very important, if you want to stay away from credit card debt. Just understand how to calculate cibil score for credit card…stay away from the money trap.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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