How avoiding these credit card-related habits can improve your Cibil score; read what expert says

Credit card use in India has increased many folds in the last decade. Advanced technology, better internet reach, and increased awareness about online lending apps have led to an exponential growth of credit cards in India. But if you fail to pay your credit card bill on time and accumulate debt, your Cibil score will be affected, and you may also fall into the debt trap. Know how you can save yourself from that situation.

You should keep your credit utilisation ratio at 30 per cent to maintain a healthy Cibil score. Photo: File/Representational

Credit Cards: Why do we use credit cards? It gives us credit facilities, helps us with costly things through equated monthly installments (EMIs), offers discounts, and gives us the convenience of paying bills later without incurring interest on them.

In a nutshell, it can make our lives easier if we use it in the right way.

But if we take it for granted, miss payments regularly, or incur debts with heavy interest, a credit card can make our lives tough.

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Any credit facility honours a disciplinarian who can use it the right way to get the maximum benefit.

AR Hemant, AVP, Bankbazaar.com. says, "Pay on time. That’s it. Just this will ensure your credit health is robust. However you use your card, timely and full repayment ensures peace of mind. But if you start falling behind on payments, you have a problem. Then, you need to start taking the necessary steps to control your credit use."

He talks about a recent trend where a credit card holder gives the card to a relative or a friend and the taker doesn't pay the bill after using it.

"There’s another kind of credit behaviour I’m coming across and that’s people giving their credit cards to friends and family members. The typical concern being raised is that the friend or relative is using the card but not paying back the dues," he says.

"Firstly, this behaviour is in violation of your card’s terms and conditions. Nobody but you can use your card. Secondly, even if someone else is using your card, it’s still your card and clearing its dues are your responsibility. Failing to pay your dues would rack up late payment penalties and interest on dues, and wreck your credit score which would make getting fresh credit nearly impossible," he adds.

In this write-up, we will tell you how you can use a credit card to avoid falling into a debt trap and improve your credit score.

Avoid having more than one credit card

When you take a credit card, ask yourself about your requirements for it and how you will use it.

You may use it in emergencies, for purchases you can't afford in one go, or to take advantage of discounts.

If you think a credit card with a moderate credit limit will do the job for you, don't go with a higher one.

If you think one card is sufficient, don't go for a second one.

The habit of owning many credit cards may entice you to indulge in a shopping spree that may incur debt for you.

Always remember that using a credit card is like using a loan that you have to pay on time.

Maintain good Credit Card Utilisation Ratio

Every credit card has a limit. It can range from thousands to a few lakhs.

The amount of credit that you use from your total credit is known as the credit utilisation ratio (CUR) or credit utilisation limit.

Though you are free to use the 100 per cent limit on your credit card, most credit card agencies recommend using only 30 per cent of your total limit for a high Cibil score.

E.g., if you have two credit cards with a Rs 1 lakh limit each, your total credit limit will be Rs 2 lakh in a cycle.

For a good Cibil score, you should not spend more than Rs 60,000 (30 per cent of your credit limit).

Don't take credit cards just to avail offers

Sometimes, we purchase a credit card because it offers discounts on a particular app or a product.

However, when we have a card, along with that product, we end up purchasing many unwanted things and piling up huge bills.

At the same time, the majority of cards are not lifetime-free; you have to pay an annual maintenance bill for them.

So, purchasing a card only for a particular offer may not be the right decision most of the time.

Don't close card suddenly

Sometimes, if one of your credit cards is not in use for a long time, we close it abruptly.

It's a bad practice that can damage your Cibil score.

First, it decreases your credit limit as well as your CUR, forcing lenders to think that you are using a higher amount of your available credit.

Second, it lowers the average age of your account and shortens your credit payment history.

So, the best thing is to not renew it rather than close it midway.

Avoid withdrawing cash

Though credit cards offer cash withdrawals, using them for that purpose can also affect your Cibil score.

Withdrawing cash from an Automated Teller Machine (ATM) gives the lender the signal that your financial situation is not good, which affects your Cibil score.

Second, you have to pay a charge for such cash withdrawals.

Plus, the interest charge is calculated from the day of withdrawal.

It can be as high as 4% per month. At the same time, you get no reward points for withdrawing cash through an ATM card.

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