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Can a Credit Card Improve your CIBIL Credit Score?

Can a Credit Card Improve your CIBIL Credit Score?

July 9, 2022
5 min read
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Can a Credit Card Improve your CIBIL Credit Score?
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Your credit card can be used in a variety of ways to improve your CIBIL score. This is due to the fact that it is a credit instrument, and its wise use increases your credit risk exposure and mix. All the repayments that you will be making towards your credit card expenses will impact your CIBIL credit score

The CIBIL credit score, or credit score, of an individual plays a major role in the loan application process, so maintaining a decent credit score is essential. CIBIL credit scores are based on your credit history, and a credit card can be used to improve your CIBIL credit score. A high score indicates creditworthiness and can lead to faster approval of loans with better interest rates, but a low CIBIL credit score indicates a riskier borrower and that can reduce the likelihood of loan approval.

Credit cards are rapidly being used to achieve short-term financial objectives. While the credit card has its benefits, it also has certain drawbacks. For example, maintaining a credit utilisation ratio of 30% of the credit card limit is recommended. Going beyond 30% reflects that the customer is credit hungry, which will lead to a negative influence on their CIBIL credit score.

Let us look at how exactly a credit card can improve your CIBIL credit score: 

1. Finding the Right Type of Credit Card

Credit cards have become much more accessible in recent years, and many lenders offer you unique offers. Keep in mind that each offer will result in a credit application, which will necessitate a hard inquiry into your CIBIL credit report by credit card issuers. Because hard inquiries reduce your CIBIL credit score, you shouldn't accept all of the offers you receive right away. Preferably, you should only use a credit card that is appropriate for your spending habits. This way, you may take advantage of any available bonuses or perks without having to apply for multiple credit cards. 

2. Making Regular Payments

Even if you are unable to pay off the entire balance owing on your credit card, you should try to make the minimum payments on or before the payment due date. This will demonstrate to lenders and financial institutions that you are not a habitual late payer and can be a positive credit risk in the long term. However, clearing off as much of your credit card debt as quickly as possible might significantly improve your CIBIL credit score.

3. Restricting Cash Withdrawal

Withdrawing cash using a credit card will not directly impact your CIBIL credit score. However, remember that whenever you make a withdrawal using a credit card, you have to pay an additional withdrawal fee along with the interest rate for the cash that you have withdrawn. Interest rates on cash withdrawals by a credit card are too high, and this might lead to non-repayment of the debt over time. This will bring down your CIBIL credit score. 

4. Use Only 30% of the Limit

A credit utilisation ratio is the number that you get when you divide the total expenses made on your credit card by the assigned credit card limit. Your credit utilisation ratio should be always less than or equal to 30%. This shows potential lenders and financial institutions that your personal finances are not struggling. 

5. Pay the Total Amount Due

A minimal amount due is a tiny part of the total outstanding amount on your credit card each month. If you merely pay the minimum amount due on a regular basis, you may find yourself in debt. Interest compounds on your total outstanding balance when you roll over a loan by paying only the minimum payment. As a result, it is recommended that you pay your credit card bills in full. Try to pay the total amount due each month. 

The majority of consumers use credit cards to make substantial purchases with the intention of paying them off over time. While this may appear to be a viable alternative, if repayments are not made on time and in full, it might have a negative impact on your CIBIL credit score. To avoid being burdened down by a maxed out credit card, it is always good to budget responsibly and make purchases with cash wherever possible. This can help you develop an impressive credit history. It will also show the potential lenders that how well you have managed your money.

This article may help you better understand how to make the most out of your credit card while simultaneously improving your CIBIL credit score. It is critical to understand how to improve your CIBIL credit score with the help of a credit card. Remember that achieving a stellar credit score starts with smart money management. If you have multiple credit cards, make a plan to divide and strategize your spending so that you don't overspend on any one of them. As a result, you will be able to have a strong credit card limit, which will prove to be helpful during emergencies.