08-Jun-2019 written by : FSI-Team
Credit score management can be a tricky subject for many. This is because there are many factors that can affect your credit rating. These include loan repayments, credit utilization ratio, credit variety, discrepancies in credit report, etc. However, it’s credit cards that often play the biggest role in score calculation. This is because there are millions of credit card users in India but there is a lack of awareness about their usage. For instance, did you know that failed credit card payments can have an adverse effect on your credit score?
You may find it surprising, but even a single failed credit card payment can have a noticeable impact on your credit rating and push you to improve CIBIL score. This goes for standard credit cards and also add-on cards for which you are held accountable for the payments of other users.
The first thing you need to know about credit cards is that the interest on missed payments is compounded daily. The monthly interest rate which ranges from 3-4% is applied to the outstanding balance. So, even if you are late with a single payment, the interest amount will be higher than your expectation.
Another thing that’s worth noting is that CIBIL score is based on the past 24 months of your credit history. The overall score is based on the following factors which are also shared with their respective weightage in the scoring model:
Repayment history refers to the payments of credit cards, loans, etc. If your history comprises timely payments, then you can expect to build a good score. However, if you have been late with the payments, even just for 1-2 times, then you may find your score dropping (you can verify the same by checking your free CIBIL score).
As you can see, the repayment history alone makes for a third of your entire score. So, you can imagine the kind of impact it can have on your rating if you are not careful with debt repayment.
Credit exposure refers to your existing debt and related behavior. For instance, if you already have a few loans that you are repaying, and now applying for another loan, then it can show a “credit hungry” behavior. This puts you in a bad light and may give the future lenders a reason to reject your loan application.
Individuals who have experience with both secured and unsecured loans, credit cards, and other forms of debt are able to get a higher credit rating than others. On the other hand, those who have credit experience in a single format viz. a personal loan, home loan, etc. or just credit cards, then they may need to improve CIBIL score by increasing the variety.
Apart from the variety, the duration of credit history also has a huge impact on the rating as the longer is the history, the higher is the score. This is because longer history makes it easier for a lender to trust the borrower.
Other factors that affect your score include credit utilization ratio and recent inquiries. The first i.e. credit utilization ratio is the ratio of your average monthly spending with the credit cards and of the combined credit limits on the cards. So, if you are using two credit cards with a credit limit of Rs. 50,000 on each and your monthly spending is also Rs. 50,000, then the ratio will be:
Ideally, your ratio should be below 35%. You can take steps like increasing credit card limit or decreasing your expenses to bring the ratio down.
The other factor i.e. recent inquiries are the inquiries made by the lenders to get your paid or CIBIL score. Too many inquiries like these can be bad for your credit rating.
As you can see, repayment history makes for 30% of your credit score. So, it’s important that you pay all your loan EMIs and credit card bills on time if you want to protect your rating and qualify for future loans easily. Stay careful, and good luck!