With Credit card companies doling out online credit cards that come with attractive rates of interest and loaded with reward points, it is easy to believe that using credit cards is the best thing that you can do. After all what can be more convenient than swiping a piece of plastic to buy everything from groceries to gadgets? But as convenient as they are and can serve a great way to build and improve your CIBIL score, it comes with an unwritten disclaimer. Over usage of your credit card can lead to the decline of your CIBIL score that bring down your credit worthiness when you make an application for a fresh line of credit.
While most financially conscientious people know that they need to increase CIBIL score to keep their credit profile intact, most of them remain under the impression that just making timely repayments on credit lines is enough to keep one’s CIBIL score high. While payment history is undoubtedly the single largest factor that impacts one CIBIL score, the other large factor that impacts your CIBIL score is your credit utlilisation (or the amount of credit you use as against the total credit made available to you).
Ideally your Credit Utilisation should not exceed 30% or at best should be kept under 40%. Therefore, if your credit usage is over 50%, it is time for you to take a step back as you are stepping into a potential debt trap, and your credit utilisation is much higher than desirable and will hurt your CIBIL score. Under such circumstances here are the things you can do:
Consider increasing your credit limit
If you are regular with your payments and have maintained a good repayment track record with your card issuing bank, your high credit utilisation can be because a low credit limit. If repayment is not an issue within each billing cycle, the first thing you should consider is enhancement of the credit limit on your credit card. When you enhance your overall credit limit, your credit utilisation goes down immediately.
Use your emergency funds to make credit card payment
If your credit card usage is over 50% it is an indication that it is dangerously high and the first thing to do is make an immediate payment of your outstanding amount. Not only do you end up paying a higher rate of interest if your credit utilisation is high, your CIBIL score will be in jeopardy as well. If you do not have ready cash in your savings account to make an immediate repayment, consider using a part of your emergency funds to make the repayment. This is especially a necessary move you need to consider if you are preparing to take a big line of credit like a home loan in the near future and are in the process of comparing home loans.
Take a debt consolidation loan
If your emergency fund is not substantial, or using it is not an option for you, you can also think or repaying your outstanding credit on your credit card with an easy personal loan. It is prudent to compare personal loans and do your research before you opt for one that is best suited for your needs. A debt consolidation loan through a HDFC personal loan, ICICI personal loan or for that matter from any other lender will not only clear your outstanding debt on your credit card, it will play a significant part in improving your CIBIL score as well.
The fact remains that the personal loan interest rates are not only far lower than the interest being paid on any credit card, it also helps in streamlining the finances on account of fixed monthly EMI.
Transfer balance to a new credit card
If you think that your current credit card issuer has not given you a fair deal and you can do better on your credit utilisation, you can consider a balance transfer to a low interest credit card. However, do bear in mind that is a tricky option to exercise, as you will be eating up the credit limit of your new card as well if you transfer the entire balance onto it. Additionally, a credit card balance transfer makes sense if the benefits are substantial. This means, that you must compare credit cards thoroughly to examine whether you are getting a substantial reduction of 1% or more over your current rate of interest or are getting easier repayment options.
However, you should avoid getting into such a situation in the first place. Here are some easy tips to ensure that your credit utilisation does not exceed 30%.
- Be aware of how much you are spending on each credit card you own.
- Put credit limit alerts on your card
- Maintain a high limit credit card and be careful about your usage
- Keep a strict vigil over your credit card statements and curtail unnecessary expenses on your credit cards
- Spend small amounts on your credit card and make repayments in full in each billing cycle
By following this basic financial discipline, you will be able to keep your credit utilisation under check and avoid a low CIBIL score.
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