Who is a responsible person? An individual who is always taking care of the liabilities that are on him/her. When we talk about a financially responsible person, is the one who is able to keep a balance between the spendings and savings. Further bifurcating, a person who has applied for any type of credit is responsible when he/she makes the regular payments of the credit that they have taken. And when it comes to a credit card, it’s the one who pays the credit card bill in full amount on or before the due date. The question may arise is, why?
A credit score is an important aspect of today’s lifestyle where many of the people work on credits, Credit Cards, and loans taken from financial institutions like banks and NBFCs. The credit score is determined by five factors, Payment history, Amount owed, Credit mix, New credit and Length of credit history. Here, the most import and the highest weighted parameter is Payment history. It consists of 35% of the whole score. One may check the score from any of the credit bureaus that are established in India viz. Transunion CIBIL, Experian, Equifax, CRIF Highmark, they have the same score of 35% for payment history. Paying the bills of the credit cards and paying them timely shows that the borrower is accountable and serious about the credit that he/she has taken and the leverage that has been given to them.
Some may say that a few missed or late payments do not make a much difference. But, one should never listen to them. If not initially, but definitely eventually the credit score will get affected. Because eventually it will be a habit and then the score will take huge dips. There have been many examples that few missed and delayed payments a decade ago, which are obviously reflected in the credit report affected on the approval of bigger loans like home loans or business loans now. They either were not able to get the loan approved because of the small careless attitude a decade ago and they were to end up paying a huge amount of interest as they had Low CIBIL Score. The score ranges from 300-900 where 900 is highest and 300 is lowest. 750+ score is a good score, 600-750 is considered average and any score below 600 is considered low or bad score!
Let’s understand this by one of the examples. Sanjay, A 34 years, IT analyst is a project manager in a reputed firm. He has been living away from the family since he was 18. I.e. much sooner as he completed his 12th-grade studies. He did his bachelors and started working at the age of 21. he got the credit card when he was 22. He then took an education loan at 25 and persuaded his masters. First few months were okay as he had saved while he was working. But, later at the end of the third semester which is a year and a half after he started doing his masters, all his savings were exhausted and he then started to use the credit card. Since there was no source of income and he did not want to ask his parents, they were almost seven to eight months where he either was paying the only minimum due or sometimes skip paying the bills or multiple late payments. He knew he was not doing correctly. So he went to the bank and asked them to close the account and then forgot it. Much later, when he was 32, he wanted to buy a house and so he applied for a home loan. And when getting it rejected he checked his credit score and credit report. He had Low CIBIL Score and the major reason was that card which had applied to close it for. It took him two years to get the score in level and had to anyway pay that amount plus the interest that was charged for these many years!
So, if you have a credit card or you may have credit cards, make sure you do not make defaults or do late payments or miss few payments as it will affect the credit score and that will be always reflected in credit report!