What is better for CIBIL score- Credit Cards or Personal loans?

Credit cards and personal loans are the two most popular types of unsecured debts available out there in the market. While a personal loan is a good way to finance lump sum for your monetary needs like buying a vacation or your favourite gadgets, credit card is more of an ongoing business of taking credit every month and paying it back before due date. It is important to note that both have a due date or EMI / bill payment which should not be missed.

Personal loans are considered the most expensive forms of loans, and yet their interest rates are lower than those of credit cards. The interest rates of personal loans become applicable right from day one, as soon as money is disbursed. It is a short term loan that requires minimum documentation, and once the money is disbursed no-one questions how the borrower has spent it. Thus, a personal loan is a good way to improve CIBIL score if it is low. A borrower can take loan and ensure that he/she pays all the EMIs on time and closes the loan as per agreement. This will create a positive effect on the credit report. The disadvantage of personal loan is that, if the borrower is not able to pay EMI as per schedule it immediately reports as a default in the CIBIL report. This has grave negative consequences. Also in case the borrower is not able to pay the personal loan in full, and goes for a loan settlement, this reduces the credit score. Thus, while a personal loan is a great instrument to get quick finance, it is a two-edged sword that can make or break your credit history.

A credit card on the other hand is an ongoing credit instrument, the biggest benefit being that if you plan your expenses properly according to your billing cycle, you have almost 30-40 days of interest free period wherein to make the payment and pay only the amount that you actually spent. Many credit cards today also offer the facility to convert any big purchase in monthly EMIs for a small charge. Thus it is a suitable credit instrument for person with monthly source of income. All credit cards offer a facility of minimum payment due. If you pay the minimum amount due, it does not show as a default or missed payment in the credit history. But this is actually a trap, because by paying only the minimum due amount, you end up starting interest levy on the outstanding amount immediately. This interest is cumulated on daily basis and can be very high (as high as 35-40%). Thus in the next bill you receive an exorbitant bill amount which may be further beyond your capacity to pay.

Thus, both personal loan and credit card can affect your CIBIL report in positive and negative ways. It depends on the financial needs and financial capacity of individual borrower to take what suits them.


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