How Important Is One’s Credit Score?

Indian loan market has seen a rapid growth in recent years. Gone are the days, when people used to take loans only in times of financial crisis. Declining interest rates and flexibility to repay have made loans an attractive option to fulfil one’s needs today and repay the amount in equal monthly instalments. With this trend, credit scores and credit reports have also gained importance. People are waking up to the fact that scores affect many aspects of their financial life. So many people who have a low CIBIL score are now taking steps to improve and maintain it. They check their free credit score from all the three credit bureaus to keep track of their credit health. But is CIBIL score only a matter of concern to people looking for loan approvals. No, the importance of score goes much beyond that. But before we delve into that lets understand what a credit score is.

Three credit bureaus in India CIBIL, Equifax and Experian compile financial data shared by the member banks and other lending institutes relating to the credit taken by each individual. These bureaus prepare a credit report for each individual, which basically reflects your credit card and other loans repayment history. Based on your credit card usage and repayment track record the bureaus calculate a credit score. The way your marks had determined your level of knowledge in school, in the same way, the credit score determines the risk factor associated with a borrower.

Here are some places where your credit score will be evaluated

Loan approvals- Checking your credit score is one of the first things that lenders do to evaluate whether you are worthy of giving a loan. A high score helps in gaining lender’s trust and assures you of easy approvals. A low CIBIL score indicates that you haven’t dealt with your past debt obligations responsibly, hence lenders feel wary of lending you money. Even credit card approvals and credit limits get affected by your score. Hence a good score comes in handy in obtaining any kind of financial assistance.

Interest rate- An excellent CIBIL score not only helps in getting loan approvals, it also helps in bargaining for a better rate of interest. Lenders are ready to cut down on interest rates if the past records show that you are a diligent and responsible borrower. A low score costs you a lot, as banks charge a high interest rate to cover the risk that they are taking by lending you money. Hence your monthly interest outgo is directly impacted by your credit score.

Employment- Unheard of a few years ago, it is now increasingly becoming a common practice to check the CIBIL score of prospective employees. Credit checks are now an integral part of the hiring process  for jobs in the finance sector, or positions which require a person to handle company’s money. It is basically done to ascertain whether you are responsible in handling money. So if you are looking for a job, check your free credit score to see that your credit profile is in good shape.

Insurance premiums- Whether you are buying a home insurance or a car insurance your score will play an important role in determining the insurance premium that you pay on it. A low score can cost you thousands of rupees more than someone who has an excellent rating.

Renting property- Your CIBIL score can influence the rental opportunities that you have, as many landlords too check your score before letting you out their property. A landlord may not want to take the risk of not getting paid by renting his property to a person with a low CIBIL score. They want to be sure that they get their rent on time, so they prefer renting to a person with good credit who has shown responsible behaviour in the past.

You can order your free credit score from any of the bureaus once every year to monitor your credit situation. An excellent credit rating is anything higher than 750, but even if your score is between the range of 700-750, you can easily qualify for loans and bargain for low interest rates. A score less than 600 is considered as a low CIBIL score. If you fall into this category don’t lose heart. You can still get your financial life back on track if you take conscious efforts and work towards improving CIBIL score.

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How is my Credit Score Determined?

A credit score plays an important role when you apply for a loan or any line of credit. It’s a three digit number which is used by the banks or lenders to evaluate whether or not they should sanction your loan. It is important to understand what your credit score is before applying for a loan, so that you have an upper hand in loan negotiations i.e. interest rates, processing fees etc.

Imagine you have applied for a loan and your loan gets rejected. You have been told to apply for a loan after you build a good credit score. Many questions will cross your mind like, what is my credit score?  How to check cibil score? How do I improve it? Now this is the tricky part! A credit score is a compilation of a lot of factors associated with your financial things.

Today we will set sight on how a credit score is determined,

Payment History

The most important factor which contributes to your cibil score is your payment history. It accounts for 35% of your score. It is a compilation of factors like : your account information, any default payments, how long the default payments are carried forward, if you have filed for any bankruptcy in the past, etc. If you would like to see a good hike on your cibil score, you should make regular payments to the lenders and make sure you do not have any default payments.

Your balance payments

The credit bureaus have each and every financial detail of yours. They monitor your financial activities on regular basis. Your credit score also gets influenced by the amounts owed by you to the banks or lenders. For example, you have a credit card and its limit is around 1 lakh rupees, imagine you have spent a fortune on the same and when the due date arrived, you converted a lot of transactions into EMIs. This way you have blocked your limit at the same time you owe a lot of money to the bank and the same is reported to the bureaus. It contributes a whopping 30% to your cibil score! It’s better to spend less rather than spending more and facing financial instabilities

Length of Credit

Building a good cibil score is a lengthy process and you need to start somewhere or the other. Once you have applied for a loan or any other financial product like a credit card your transactions start getting recorded with the bureaus. Various accounts have different accountability to your score. For example, if you applied for a home loan, the loan account will be active for at least 15 years. On the other hand a car loan lasts maximum for 5 years. Let’s take a credit card for example. It does not have an account expiry date and you can use the same, until the time you don’t want to close it. It contributes 15% to your credit score. In any case, do not close your credit card account, as that will influence your score under payment history section.

Number of inquiries

We understand there are a lot of financial products available in the market. Some of them so mouthwatering, you would definitely like to get it. Did you happen to know, for each financial product inquiry; your cibil score is being checked? The more inquiry you make with the bureau, the more your chances are to get your cibil score down. As there are a lot of products in the market, only go for the product which is tailored to your need and try making fewer inquiries with the credit bureaus.

Types of Credit Used

There are various credit accounts with which you can be associated with. The cibil score is also determined with the types of credit accounts you hold like, loan accounts, credit cards, etc.

This is just tip of the iceberg as far as credit score goes. It is important to know all these factors and how they contribute to your cibil score. But what’s more important is how you are managing your finances. The more you are financially responsible, the more you have chances of getting a loan without any hassles.

4 Different Credit-Scores You Should Know About

The first rating agency in India was established in the year 2000, which makes the history of credit health assessment in India less than two decades old. Since then three more credit rating agencies have been set up in India; thus now there are four different agencies then rate individuals based on their credit behavior and credit history. Although while the basic tenets of rating remain same, there might be few differences in their scoring model and also some other aspects. When you seek a loan, the prospective lender can seek the credit report from any of these four agencies. Thus it is important that one knows the basics that pertain to these different scores that one may have.

What’s in a Name?

The lender can seek the credit report from any of the four rating agencies to judge the credit health of the applicant and scores from all of these are valid. The rating by all agencies is done based on five factors that includes : the repayment history for paying credit card dues and EMIs, hard inquiries made by lenders, credit utilization, credit mix and the length of the credit history. The information supplied to all the agencies by banks and FIs are also same. However, there still might be a minor difference between the scores of all the four agencies due to the weightage that might be given to each parameter which may cause a variation of 5 to 10 points between scores of two different agencies but not more than that.

However, if you follow the basic tenets of being a responsible borrower then you will have a healthy score across agencies and if you want to increase credit score be sure to check what is included in the score calculation. When lenders seek a report from any of these agencies they are aware of the difference in the rating models of each of them and they will keep this in mind when evaluating the CIR of the customer.

As per the RBI guideline, all rating agencies have to provide a free report once a year to all customers who ask for it. The cost of getting the reports (mentioned below) is if you need another report after getting your free one in the same year.

  • TransUnion CIBIL Ltd:

It’s only fair that the first credit rating agency we talk about is TransUnion CIBIL. CIBIL was set up in the year 2000 and was given a license by RBI in the year 2009. TransUnion acquired an 82% stake in CIBIL in 2016 and hence it is now known as TransUnion CIBIL.  The score ranges from 300 to 900.  You can get a report and score by paying Rs. 550; you also could opt to take the option twice or four times in a year or just get the report for Rs. 159. Report is sent in 7 to 10 days; if online verification is successful then you can do a CIBIL score check through email too.

  • Experian Credit Information Co. of India Pvt. Ltd

This rating agency was set up in the year 2006 and was given a license by RBI in the year 2010. The rating agency had a different range of scoring but now they also score in the range of 300 to 900. The report can be sought by paying Rs 138 or the report and score both can be bought online by paying Rs. 399. If you send the request online you can receive the report immediately via email, an offline request may take up to 20 days.

  • Equifax Credit Information Services Private Limited

This agency received its license in 2010 and it also scores between 300 and 900. Basic report and credit score can be obtained by paying Rs. 138 and Rs. 400. Reports are sent within 7 to 10 days of the request being sent.

  • CRIF High Mark Credit Information Services Pvt. Ltd

High Mark was established in 2007 and received the license from RBI in 2010.  High Mark also had a different scoring pattern earlier but now just like the other three agencies above their scores also range from 300 to 900. You can get the report and the score by paying Rs. 399.

All the agencies have a defined and well laid out dispute resolution mechanism. So if you find out there is a difference of 50 points or more between score by two agencies be sure to find out the reason for this discrepancy.

3 Credit Myths that can destroy your score

Credit history affects various financial aspects of our life. It is crucial to understand what credit score and reports are, how the score is determined and how one can maintain a good score. There is a lot of information available to guide you to towards a perfect credit score. But do not believe everything that you hear. There are many credit myths that are also doing the rounds. One wrong step can lead you in a wrong direction. Do not get misled by such myths that can actually tank your score.

 

Here are some misconceptions that can harm your credit score. Beware of them and get to know the real facts.

 

Myth 1 : Closing credit cards will improve credit score

 

Some people believe that having a number of credit cards has a negative effect on the credit score. They believe that closing some old unused credit cards will help in raising the score. But this isn’t the way credit score works. One of the major factors that determine your score is the credit utilization ratio. It is the amount of credit you use compared to the total available credit limit. For a good CIBIL score you should have high credit limits and you should use not more than 30% of it. Closing credit cards will reduce your total available credit limit and increase your utilization ratio. This will drastically reduce your score. Closing old credit cards also affects the “length of your credit history” factor that impacts  one’s credit score. It reduces the average age of accounts and hence brings down the score. So if you really need to close some cards, close the newer ones. Another option is to close cards with a lower credit limit. Do a CIBIL score check to ensure that the impact of closing the account isn’t too drastic. Also, note that some credit card companies cancel the card if it is inactive for a long period. So charge small expenses to keep the card active.

 

Another misconception regarding closing credit cards is that if you close a card with a bad credit history, the information gets erased from the credit report and your credit score improves. The reality is that you cannot erase  credit card’s history recorded by the bureaus in your credit report just by closing the credit card.

 

Myth 2: Not using credit cards is good for CIBIL score

 

You will see many tips on improving CIBIL score that advises people to pay off all their outstanding balances and stop using their credit cards. They proclaim that going on all cash basis and staying out of debt will help improve your score. But infact such a decision can be destructive for your score. In order to have a good CIBIL score, one needs to show how well one is capable of managing revolving accounts. For this one needs to keep the credit cards active by charging expenses and then paying them off every month. Even if you have a mortgage or any other instalment loan where you are making payments diligently you will not have that perfect score if you do not use credit cards. That’s because the CIBIL score calculation also takes into account the credit mix. A person who displays responsible behaviour in using both types of accounts will have a better score.

 

Myth 3 : You need to carry a balance on the credit card to raise your score

Using the credit card is necessary to build the credit score, but carrying a balance is not. You can work towards a good score if you pay off the entire amount when the bill arrives. By carrying a balance you will have to pay a high interest rate on the outstanding amount. This isn’t required at all to show that you can handle credit responsibly. In fact, paying off the entire bill amount will help in keeping the utilization levels low which is good for your score.

 

Hope this article cleared up the mystery that surrounds the CIBIL score. You will now have a better understanding of how the CIBIL score calculation works, and what you should and should not do to ensure a good score. But what if your score already took a hit because of these myths that you carried in your mind for long? Not to worry! If you are in need of funds you can avail for loans for low CIBIL score offered by many private lenders in the market.

What Do the Credit Score Numbers Mean?

A credit score plays an important role when it comes to opting for a loan or a line of credit like a credit card. Credit scores are used by lenders and various Non-banking financial services to evaluate your capability to avail a loan and make decision whether they can offer you a credit. The score is a result of your payment patterns, any default payments, any past settlements and many more.

There are many different scores which are available in the market for the lenders like Experian, Equifax and so on but Indian banks and non-banking financial services companies prefer CIBIL as their lead bureau for credit scores. Credit Information Bureau India Limited also known as CIBIL was founded in year 2000. It helps providing credit information to Indian banks to filter loan applications.

There are different categories of cibil score which helps boost your loan application and also gives you added benefits while availing a loan. The score ranges from 300 to 850, each financial transaction either contributes or downturn your cibil score.

Today we will sight the score breakdown and help you to understand what the credit score mean,

Score 0-349

If your credit score is between 0-349 this means you have no lending record. Many of us think to make our purchases on cash and do not take loan for any purpose but a no cibil score is equivalent to a bad cibil score. Always try getting small consumer loans from time to time and make regular payments on the same to see a great hike on your score. This will help you get started with the process and in future if you need a bigger loan like a home loan or a personal loan you will be able to avail a loan with ease.

Score 350-650

If you are in this category of credit score, most probably you have made a lot of financial mistakes like not paying your dues on time also if there is a settlement in your account. This will definitely hamper your chances of getting a loan in future. If you have not made a payment on time the transaction remains in your report for at least 5 years. A low cibil score will always pull you backwards from financial harmony, if you need help with repairing your credit, you can always approach a financial professional.

Score 650-699

This is termed to be a safe zone and you need to work hard to reach in the good score range. If you are in this category it is much likely you will get a loan but chances are you will need to pay much higher interest rates as compared to other options available in the market. Try not to default any loans further and you credit score will be up in no time.

 

 

Score 700-759

This category is called the safe category. In general terms you can easily get a loan from any lender without any hassles. This indicates that you make all your payments on time with almost no defaults and also your credit balances are low. If you are applying for a loan, you will get high priority as compared to others and you can also negotiate on the interest rates offered by the bank.

Score 760+

We can say that, very few people achieve this milestone. You can be in high demand between lenders if you fall in this range category. This credit score range means you have financial integrity and do not default your payment even by mistake. You have a long history of line of credits without a single default. They receive the best offer available in the market and also can negotiate with the lender on interest rates, processing fees and so on. It is really hard to achieve this breakthrough, but is even harder to maintain the same.

A credit score states a lot about you when it comes to financial integrity and how you manage your loan funds. It is a ladder you can use to achieve financial milestones and achieve an easy credit in desperate times, but the same factor can be the worst nightmare of your life and can haunt you for a very long time. Borrow responsibly and repay well to live in financial harmony.

4 Things which look harmless but can hurt your score

A credit score affects one’s financial life in numerous ways. We all know that missing a credit card payment or loan EMIs will damage our credit profile. But there are some things that look harmless but can have a drastic negative impact on our score. Avoid these financial decisions to avoid unexpected surprises.

Co-signing a loan – If your friend or a family member is not able to qualify for a loan, you may not find any harm in co-signing a loan in order to help him. However one needs to understand the financial implications of such a decision. Co-signing a loan has almost the same effect on your credit score as signing a loan oneself. The co-signed loan account will appear on your credit report like any other debt. By co-signing a loan you become legally responsible for paying the loan EMIs if the primary borrower fails to do so. If the primary borrower makes a late payment or misses a payment altogether then it will affect your credit profile as well. Co-signed loans are considered while calculating your debt to income ratio even if they are being paid on time. It reduces the lender’s perspective of how much you can afford to pay back and hence reduces your ability to borrow funds. So if you are planning to apply for a home loan in near future it is better to avoid co-signing for others.  If you do co-sign a loan and take a risk of its implications it is imperative that you check your credit report and score regularly. Keep track of how the co-signed loan is affecting your credit score.

 

Closing old credit card accounts – Sometimes in an effort to clean up credit reports and take control of one’s finances, people close their old credit card accounts that they no longer use. But doing so affects the score negatively. Credit utilization ratio that is a major determiner of CIBIL score is calculated by dividing the total credit card balances by the total available credit limit. Closing old credit cards, reduces your available credit limit and hence increases your utilization levels. This has a major negative impact on the credit score. Length of the credit history also affects one’s score. Old accounts help in raising the average age of your accounts that is good for the credit score. Closing them will reduce the average age of accounts and lower your score.

Paying off an old charge offs- It may be hard to believe but yes, paying off old charge offs can actually reduce your score than increase it. Charge off accounts are those that you haven’t paid and the lender no longer expects any further payments on them. Payments on these accounts will reactivate them and make them appear more current. The collection agency may report it as a new debt than a written off debt. As new accounts have a greater weightage during the credit score calculation, paying written off accounts can bring a drop in your score.  Make sure you do not do any such mistakes before applying for a home loan. Even a few points of score can affect your home loan approval process.

Pushing credit limit- We all know that credit utilization has a major impact on our credit score. That is why it is advised to keep this utilization level below 30%. But what many don’t know is that paying off the balance in full each month may not necessarily mean that you have low utilization levels. If you are in a habit of maxing out your card often you may have high utilization levels that maybe affecting your score negatively. The balance that is used to calculate the credit score is your last statement balance. So if you have charged an amount close to your limit, you will have a high credit utilization ratio. Such over dependence on credit impacts your score negatively.

People who have been diligently paying off their debt obligations can also have a low credit score if they make some of the above mistakes. If you find yourself in such a situation do not despair. You can still apply for loans for bad credit where lenders do not just go by a theoretical evaluation of score. They weigh several other factors to determine your eligibility. So if you are an otherwise responsible borrower, but your credit score took a hit because of the above reasons, you can easily get approved for loans for bad credit.

What is the Lowest Credit Score One Can Get?

Credit scores have caused a lot of anxiety in recent time. Whether you wish to apply for a credit card, take a loan to buy a car or house or refinance your existing loan; a minimum credit score criteria is a major hurdle that needs to be crossed. Lenders base their approval decisions on the score that you have attained. That is why people are consciously making efforts to increase their CIBIL score.

If you haven’t been paying attention to your score you may be wondering what could be the worst case scenario with your credit profile. What is the lowest credit score that you can get? While a credit score range depends on the credit scoring model that a specific bureau uses to calculate the score, in most cases this number lies between 300 and 850. So theoretically your score can go as low as 300, though it happens rarely.

There are several situations that may cause the score to sink to the bottom. Items like bankruptcy, judgements and tax liens on your credit report are some major causes. Apart from these, information regarding overutilization of credit, late payments, missed payments, and accounts that go into collections also find their way to the credit report and cause your score to plummet. A credit history with a combination of these causes will result in a rock bottom score.

So if the credit score is above the 300 mark, does that mean that you can sit back and relax? Not at all! A score between the range of 300-550 isn’t considered a very good score by the lenders. Each lender has his own threshold mark based on the amount of risk that he is willing to take. You will find it hard to qualify for loans with leading financial institutions if your score is below the 600 mark. So if the score fails to satisfy the minimum threshold limit for most lenders, then you will need to resort to bad credit personal loans. These loans are given at a very high rate of interest to cover the high risk financial behaviour of the borrower.

Can you do something to increase your score? The good news is “yes”. A credit score is a snapshot of your past credit behaviour. If you start doing positive things that are good for the score, it will start showing improvement in a few months time. To begin with, you can get a secured credit card. Here you will be required to deposit an amount that serves as your credit limit. Since the issuers do not check the credit score, this card is easy to obtain even with a low score. Use the card for small expenses every month and make timely payments. You can also take a bad credit personal loan and start making timely payments to build positive history. As new positive information gets recorded on the credit report the effect of old negative information starts diminishing.

People with an excellent credit score have a long history of on time payments and low balances on their credit card. Since they are at the least risk of defaulting such people can easily qualify for loans at low rate of interest. Even if your credit profile is in a very bad shape you too can aim to achieve a high score, by practising good credit management. Here are some good financial habits that you should follow.

  1. Analyse your report to see where you stand and identify actions that are bringing your score down.
  2. Pay your bills before the due date
  3. Do not use more than 30% of the available credit limit on your credit cards.
  4. Avoid opening unnecessary credit card accounts
  5. Do not close old credit card accounts
  6. Maintain a good mix of revolving and instalment credit.
  7. Check your credit report for errors and dispute if you find any discrepancies.

When you are on your journey of rebuilding credit make sure no new negative items enter your credit report. As new positive information gets recorded in the report you will be able to put all your past problems behind and hope for a bright future ahead.

How to Save Money on Your Loans and Improve Your Credit Score in the Report

Loans are part and parcel of our life these days. Anyone who is financially prudent seeks loans to build assets and lead a lifestyle of their choice. Your ability to borrow is not limited to what you earn every month rather your ability to manage finances is something that defines your credit worth. In fact the colour of your credit report indicates your credit health.

Most of us use multiple credit accounts these days like credit cards, auto loan, home loan, personal loan, to name a few. The appetite for credit is not limited to day to day requirements and many of you would desire more loans such as student loan, travel loan or business loan. You can practically borrow for any purpose these days. However your past credit history define if you could borrow more or not.

Anyone who has a current mortgage or multiple loans would probably be using enough of his credit limit. To borrow more you would need to save on your previous loans and create a gap between what you earn and what you are utilizing. It is important to know how to save money on your loans and improve your credit score in the report.

The higher is the score, higher is your loan eligibility. Thus you should always pay attention to your CIBIL score calculation and assess your credit report at least twice a year. Factors that help your credit score include: regular repayment of loans and credit bills, credit utilization ratio, length and age of credits, credit mix and history of loan queries.

Saving on Loans and Improving Credit Score in the Report
One of the smart ways to increase your credit score and avail better rate of interest on a long term loan is by closing your previous loans. By prepaying your previous loan you would build a good history and boost your credit score.

If you are planning home purchase and need loan for the same, the lender would assess your credit history before offering the loan. With low CIBIL score or not so perfect score your low eligibility is low and you could be offered interest on higher rate.

However by prepaying your previous loan you would be marked as a potentially worthy customer and your loan application would be approved. Likewise prepayment of loan also saves you enough money.

To understand how let’s take an example.

Mr. Rajeev Shukla is an IT professional and he has savings of Rs 1000000 in his bank account. His net monthly income (after tax deduction) is Rs. 80000. He spends Rs 10000 as credit card expense every month which he diligently pays before the due date every time. He pays Rs 6000 as his car installment which is calculated at 9 percent of interest every month. The auto installments are due for next 4 years. He wants to prepay auto loan, but he has 4 per cent pre-payment penalty if he pays before one more year.

Mr. Rajeev decides to prepay the auto loan as he plans to raise a home loan of Rs. 3000000 after six months.

By prepaying his auto loan Mr. Rajeev reduces his debt to income ratio. This leaves additional credit limit and makes him eligible for more loan. It also gives him more flexibility to pay for his next loan installment. If he has additional six thousand to pay for loan installment every month he can either have a bigger loan or reduce the loan duration by having bigger installments. Also he can use this money for raising student loan for his daughter’s higher education.

Now coming on to prepayment penalty of four percent, how would he compensate that additional prepayment charge? By prepaying the loan he actually saved five percent which he would have paid as interest in the due course of time. If he could manage to get a better interest rate on his home loan for next 20 years he would further save.

By prepaying loan you would not only save money but also improve your score and worth. Thus a financially prudent person looks at his money from its worth for his future plans and never values it conservatively on its current purchasing power.

Advantages of a second credit card in hand

When people apply for their first credit card the motive is most likely to have ease of shopping (without the need to carry cash) and build a good credit history. But the second time around the objective of getting a credit card changes to a great extent. While choosing the second card people look at rewards and benefits and a higher credit limit.

If it’s been a year since you had your first card, and if you have been using your card responsibly by paying bills on time and in full each month; it may be time to reap the benefits of a second credit card. But if you are in the habit of maxing out your card, or are already struggling with a huge outstanding balance on your first card, or if you are prone to spending beyond your means then applying for a second card may not be a good idea.

Here are some advantages of having a second credit card

Backup option- Imagine what would happen if your card is lost or stolen! If you want to avoid the hassles of using cash for all your purchases till you are able to resolve the situation then get a second credit card soon. Keep it in a place different from the first card so that it is available when you lose your first card. There may also be times when the store person tells that your card isn’t getting accepted due to technical issues. A back up card always comes in handy when your first card is not available or gets declined.

Rewards- Different credit cards come with different kinds of benefits. Some credit cards offer amazing discounts on dining, some give cash backs on groceries, while some give reward points on online shopping that can be redeemed on other purchases. Travel cards are the best bet if you often buy air tickets. So if your expenditure pattern is tilted towards an area where a card offers special benefits, then having such a card to cover for those specific expenses makes sense. That is why people often choose a second card to take advantage of specific reward schemes on the expenses that they make often.

Improve CIBIL rating-Getting a second credit card often works well for people who are looking at improving their CIBIL rating. Here is how a new card affects your CIBIL score. An important component that affects the calculation of Credit score is the credit utilization ratio. This ratio is calculated by dividing the total debt balance outstanding on all the cards with the total credit limit on all cards that a person owns. Getting a new credit card increases your total available credit limit and therefore reduces the credit utilization ratio. An important point to note here is that this strategy helps in raising the CIBIL rating only when the balance outstanding is not allowed to increase. If the credit card holder uses the second card for small expenses and pays back the amount in full each month, it will bolster the CIBIL rating. However if the new card is seen as an opportunity to spend more and take on more debt, then the increase in debt pile may increase the utilization rate and lower the CIBIL rating.

Deal with emergencies– Having 2 credit cards raises your credit limit. Though you may not use your card upto the limit to ensure that you get a good CIBIL rating, having an option gives you peace of mind that you have something to fall back on in case of emergencies. When a sudden medical situation arises where the credit limit on the first card isn’t enough to make payments, then the second card serves as a saviour.

Some key points to remember when you get your second card

Use the card for small expenses and pay it back in full each month to display responsible credit behaviour and improve CIBIL rating. An inactive card will do no good to your score.

Do not use more than 30% of available credit limit on any of your credit cards.

You now have 2 payment due dates to track. Do not forget to make timely payments, as it is the most important factor that affects your CIBIL rating.

A second credit card raises your purchasing power, offers you several benefits along with an opportunity to improve your credit profile. But keep your spending in check and use the card wisely so that it works in your favour.

 

Does winning a Lottery affect My Credit Score

Winning a lottery is like a dream come true. If you are one of those lucky few who have won lakhs or crores of rupees in a lottery, you may be wondering its impact on your life. Well, just having the money will not put an end to all your financial woes. How you put it to use is what determines its effect on your financial life. Does winning a lottery affect your CIBIL rating in any way? Let’s find out.

Correlation between credit score and wealth

The income level of an individual or his bank balance has no effect on his credit score. People with a high net worth may not necessarily have a high credit score. The credit score calculation primarily factors in one’s payment history and credit card usage behaviour. So even if a person has a huge bank balance, he will not have a good CIBIL rating unless he makes timely payment of his loan EMIs and credit card bills.

The wealth of an individual may be taken into account when a person seeks approval of a loan application. Banks do check an individual’s bank balance and income level apart from the credit score to determine whether the person has the capacity to repay the loan. Hence winning a lottery may increase your ability to seek loan approvals.

Here is how you can use the money to improve CIBIL score

Though winning a lottery does not have a direct impact on your CIBIL rating, it does give you an opportunity to raise your score by other means. Here is what you can do with the money to improve CIBIL score.

  1. Pay back outstanding dues

If you were unable to clear your outstanding dues in the past because of lack of funds, you would surely have a bad credit history. Late payments, collections, charge offs and other such negative remarks brings down one’s CIBIL rating. Now is the time to put your money to good use. Contact the bank and discuss that you have sufficient money to repay them. Request them to remove your name from the bank’s loan defaulter’s list. Negotiate with them if they can remove negative remarks from the credit report if you clear all past debts.

  1. Reduce credit utilization ratio

Credit utilization ratio plays an important role in CIBIL score calculation. A high utilization shows an over dependence on credit and reduces your credit score. By using the funds to pay off your credit card outstanding balances you can reduce this utilization ratio and work towards improving your credit score. Make sure you do not use more than 30% of your available credit limit. Keeping low utilization levels helps boost CIBIL rating.

  1. Exhibit good credit behaviour

Since you have sufficient money in your bank account, make sure you pay all your bills and EMIs on time. By exhibiting responsible behaviour and making on time payments one can build positive credit history.