This article is authored by Rajiv Raj, Director & Co-Founder of CreditVidya.
There is huge asymmetry of information in retail banking primarily because middlemen are incentivized by the banks themselves. Take the case of Shankar Mani. He has been using credit cards for the last 6 years. Shankar takes pride in the fact that he has credit cards from three different banks; this is not taking into account his debit card. He now wants to apply for a home loan and believes that he can use his cards to improve his CIBIL score. The Credit Information Bureau Limited, or CIBIL, is India’s first credit information company founded in 2000. We wrote about it earlier in How to get a good credit score.
Here we will help Shankar separate myth from fact.
Myth: You can improve your CIBIL score by paying a higher amount than you owe to the bank
Fact: By paying a higher amount than your total credit card bill, all you do is leave a positive balance in your credit card account which is adjusted in your next billing cycle. This does not affect your CIBIL credit score. Your CIBIL score is dependent of timely payments on your card accounts. You can lower your CIBIL score by up to 80 points by delaying a payment even by a single day.
Myth: When you pay off your accumulated credit card debts all the negatives on your CIBIL score will vanish
Fact: We have established that if you are late on your payments, it brings down your CIBIL credit score. Let’s say at some point you decide to take an action and clear all your outstanding payments. By doing so you will reduce your overall exposure on credit cards, but your missed payments will still reflect on your credit report for the next three years. Always pay your balances in full and before the due date.
Myth: Using a debit card will help improve your credit score as using a credit card does
Fact: Though debit and credit cards appear identical and are used for the same purposes, the fact is that with a debit card you draw money out of your own bank account. On the other hand, a credit card depends on the credit granted by the bank to you. In short, you have to repay the credit card outstanding at the end of the credit period. It is this repayment cycle that helps build up your CIBIL credit score. Swiping your debit card will not help you better your CIBIL score.
Myth: The interest-free grace period will continue even when you have paid the minimum amount due
Fact: While your credit card issuer implores you to pay the minimum balance due (via the bill statement), please remember that if the total amount due is not paid then the interest-free grace period disappears, which means that you pay an interest of 36-42% per annum on every paisa that you spend on that credit card. The grace period could range from 18 to 48 days. However, the interest meter is running on the very day the money is spent without any free credit period if any amount is outstanding from the last billing cycle. For cash advances, interest is charged from the date of the transaction until the date of payment. Lesson to be learnt? If you fail to clear your bill at the given time, interest is levied on all transactions.
Myth: The more the credit cards I have, the better my credit score
Fact: Too many cards become cumbersome to manage and often lead to defaulting or delayed payments. We usually advise our readers to have a maximum of two active credit cards. Too many credit cards can give you an additional spending limit or lower utilization on one hand, but it also potentially puts you at a risk of too much unsecured debt exposure. Having said that, the truth is that multiple credit cards need not mean a higher CIBIL credit score.
