The CIBIL score is evaluated and determined through a complex mathematical formula that is based on several parameters like debt repayment history, timeliness of debt repayments, frequency of loan and credit card applications and rejections, number of existing loans and credit cards, etc. Holding multiple credit accounts does not affect the CIBIL score, the lack of discipline in debt repayments does.
It may become a challenge to maintain a good CIBIL score when you hold multiple credit accounts. However, fret not! It isn’t that difficult either. Let’s discuss how you can achieve and maintain a good CIBIL score on all your credits.
Want to apply for a loan or credit card, but have a low or zero CIBIL score? Or, has your credit application gotten rejected? These are just two of the factors that affect CIBIL scores. Though there are bank and financial institutions that offer credit cards and loans against low CIBIL scores, these are usually against unfavorable terms and conditions. Here are a few steps you should take to increase and maintain a good CIBIL score by responsible usage of all your credits.
Time it right
Credit applications, that is, applications for loan and credit card, applied within a short period of time or at frequent intervals is a sign of credit hungriness. Space them out well, so that it does not reflect on your desperation for immediate credit. Avoid applying for new credit as soon as you have repaid the existing one. Instead, repay the entire debt against the current loan against your name and then wait for a couple of months before applying for a new one. The number of credits that you have after a certain point of time, account for approximately 30% of the CIBIL score. This has a weightage that is second only to the timeliness of debt repayment history, which accounts for 60% of the CIBIL score.
It is not the number of credit cards or loans against your name at a point of time, but the timeliness of your payments and other important parameters that determine your CIBIL score. For instance, if the credit utilization ratio of your credit card is 70%, when 35% to 40% is the desirable limit, it will affect your CIBIL score drastically. This, in turn, will affect your chances of securing a loan or another credit card. Also, if the credit utilization ratio is more than 60% of the total limit available on all the credit cards put together, it will minimize your score further.
A high credit utilization ratio makes prospective lenders interpret you as a high-risk borrower. In such a situation, even if your income level is above average, the prospects of you defaulting on payments are high since you have debts against multiple credit cards. In scenarios where an applicant’s credit limit on all the cards is maxed out every month, there is cause for concern. This probably implies that the applicant is exhausting the entire monthly income on repaying credit card bills, making him/her a high-risk borrower.
This is also applicable for multiple loan accounts or a mix of credit card and loans, enhancing the chances of rejection of credit.
Avoid multiple applications within a short span of time
Loan/credit card applications from multiple prospective banks and Non-Banking Financial Institutions give a negative impression of your creditworthiness, increasing the prospects of credit rejection. This, in, turn, affects your CIBIL score. Prospective lenders can access information related to the number of times you have applied from secured and unsecured credit from the ‘Enquiry String of CIBIL’ section.
Make full payments on credit card
Clear the entire amount due against your credit within the due date rather than paying the minimum amount due. This is because the remaining balance gets carried forward to the next month and banks charge a heavy rate of interest on it. What’s more, it affects your CIBIL score. It is best for you to repay the entire debt against your credit card at one go before using further credit, to prevent your CIBIL score from falling further.
Opt for auto-debit
If your forgetfulness makes you miss payments within the stipulated dates, you can give a standing instruction to your bank that has issued your credit card or offered you a loan. This will give them the mandate to auto-debit the outstanding credit card bill or loan instalment amount from your bank account on a certain day every month. Banks offer you the flexibility to decide this date as per your convenience. When you select the date, keep in mind that you would be able to maintain the necessary balance in your account around that time every month to prevent an unsuccessful auto-debit. Banks charge a hefty penalty on every unsuccessful auto-debit.
Control credit hungry behavior
Prevent withdrawing cash against your credit card. Such transactions make your financial instability and poor credit health evident, and affect your CIBIL score. This again enhances the chances of prospective lenders rejecting your loan and credit card applications, further bringing down your CIBIL score.
Check your CIBIL score at regular intervals
Access your CIBIL report to check your score before you apply for a credit card or loan. Go through your list of transactions thoroughly to ensure that there are no inaccurate data, repetitions, omissions or fraudulent transactions. These inaccuracies hamper your CIBIL score with no fault of yours, increasing the chances of rejection of loan or credit card application. If you find incorrect information in your CIBIL report, you have to raise a dispute with CIBIL and get it rectified to increase the CIBIL score, and hence, improve your loan or credit card eligibility.
Check the T&C
Read through the terms and conditions applicable on loans and credit cards of banks before taking the final decision. Get your queries clarified, so that you can make a conscious choice and eliminate the scope of taking steps that may reduce your CIBIL score.
Does paying only the minimum amount due on credit card affect CIBIL score?
Clear the entire amount due against your credit within the due date rather than paying the minimum amount due. This is because the remaining balance gets carried forward to the next month and banks charge a heavy rate of interest on it. What’s more, it affects your CIBIL score. It is best for you to repay the entire debt against your credit card at one go before using further credit, to prevent your CIBIL score from falling further.
Can I withdraw cash against my credit card without affecting my CIBIL score?
No, withdrawing cash against your credit card is a sign of debt hungriness, arising from financial instability. Such behavior cautions lenders against approving credit card and loan applications. It is highly recommended that you refrain from withdrawing cash against your credit card.
Why is checking the CIBIL score recommended before applying for a loan or credit card?
CIBIL reports sometimes contain inaccurate information like the mention of fraudulent transactions, and repetition and omission of data. Such inaccuracies affect your CIBIL score with no fault on your part. Checking the CIBIL report and score for incorrect information before you apply for a loan or credit will enable you to address the issue and get the score rectified, so that your credit eligibility improves. In case you notice such discrepancies in the CIBIL report, you need to raise a CIBIL report to get in corrected.
What is the ideal credit utilization ratio on a credit card?
The recommended credit utilization ratio is between 35% and 40%. It is best to restrict it to 35% to be on the safe side.
My credit utilization ratio usually goes beyond 70% every month. Does that affect my CIBIL score?
It is best to restrict your credit utilization ratio to about 35% of your maximum credit limit offered to you by your bank. 70% is a poor credit utilization ratio and is one of the reasons behind a drastic reduction of your CIBIL score. You have to maintain your credit utilization ratio within the advisable limit to improve your CIBIL score gradually. After your CIBIL has increased, you can apply for another credit card and divide your expenditures between the two cards, so that you can maintain a healthy ratio in both the cards. Remember that for multiple credit cards, a credit utilization ratio of more than 60% of the total limit available on all the credit cards put together will minimize your score further. However, ensure that you don’t default on debt repayments on either of your cards to prevent your CIBIL score from falling again.
Can a high monthly income improve my chances of being eligible for multiple credits?
Your monthly income is an important factor while evaluating your loan or credit card eligibility and a high income improves your chances of credit approval. However, if you have a poor repayment history on your existing credits, despite a high monthly income, there are high chances that you will not be offered credit any further, even if a lender offers you a loan or credit card, it will be against unfavorable terms and conditions like steep interest rate, low loan amount/ credit limit on credit card, etc.
