Do credit cards really help your Credit Score?

While a credit card is an interest-free way to get a credit trail, personal loans are expensive and are no value-add if one already has a credit card in getting a good CIBIL score. Too much unsecured loan on the other hand can harm the CIBIL rating, says Rajiv Raj.

Getting a credit card or a personal loan is usually not a difficult or cumbersome job to get as long as the applicant fulfills certain stipulated conditions. Compared to home or auto loans the processing is faster and easier. Do credit cards and personal loans help you credit score or not? If yes then how?

A higher CIBIL score is useful when applying for a home or auto loan as it not only improves the chances of the loan application being accepted but it can also get the applicant competitive rates.

Credit cards and CIBIL Score:

Credit cards are the simplest way to start a credit trail; plus there is no interest to be paid unlike loans if the card is used wisely. So in case you have no CIBIL rating and are looking to have one, apply for a credit card; if you already have one then also a few tips can help your credit score.

The basic mantra for maintaining a good credit score is paying on time! Nothing can beat this simple yet very important rule.

A CIBIL score is all about the way one has treated his/her debt in the past. Nothing can spoil the credit score like delayed payments or missed payments. Once in a while it may happen but ideally should be avoided. Now the RBI has given a three day grace period, over and above your due date, for making payments. Reporting to CIBIL or other credit agencies will be done in case the payment is delayed beyond three days; this can work in favour of the customer in case there are holidays or one forgets to pay on the due date.

If for any reason one is unable to make a full payment explore the option of paying the minimum amount due. This will not be considered as a default and be reported to credit agencies. You will have to pay interest on overdue amount but are saved from getting a default in the CIBIL report and also paying charges for default.

In case one is making a fresh start with a credit history, make regular small transactions ideally below 30 per cent of your sanctioned limit and pay them on time. For those who already have a trail and are looking at improving their CIBIL score, a low credit utilisation ratio can do wonders. This is second most important factor that affects the rating.

A ratio can be lowered by either controlling the spending or increasing the credit limit. Reduce unbudgeted and whimsical spending so that credit utilisation stays low. If your eligibility criteria allows then get a higher credit limit sanctioned.

One card used regularly but not touching sanctioned limit and timely payments are enough to give you a stable credit trail. In case of multiple cards, cards with a deeper history and minimum or no defaults should be kept in case one wants to surrender a card for any reason. It pays to sort out old pending issues with the credit card company. Too many credit cards reflect credit hungry behaviour.

Personal loans and CIBIL Score:

A good mix of secured and unsecured debt is helpful for a good credit score. A personal loan is an unsecured loan; however it is an installment loan and is not revolving debt like the credit card. It is not advisable to take a personal loan just to improve the CIBIL score as they are expensive and in case you already have revolving credit in the form of credit card then it is adding to the unsecured loan category in the mix of loans.

Since personal loans are not for a specific purpose they can be used for any purpose from buying a new phone, a holiday or paying of your credit card dues. A personal loan can be used to pay off pending credit card dues in case one is looking to improve the CIBIL score, but only after careful analysis and thought. If one can get a personal loan at favourable terms (interest rate is lower than what is being charged by the credit card company) then it makes sense to use this option for paying dues which may have accumulated and reflect as outstanding in the credit card statement. This can improve the CIBIL score.

If a personal loan is required for some genuine reason then be careful that you pay on time so that no defaults happen (which lowers your CIBIL Score).

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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