How Credit Card Habits (Usage, Closure, Cash Withdrawal) Impact Your CIBIL Score Over Time

Your CIBIL score is a very important number that helps lenders understand how you manage money you borrow. Think of it like a report card for your financial behaviour. Keeping a healthy CIBIL score and using your credit cards wisely are key steps towards a strong financial future. This guide will help you understand what your CIBIL score is, how your credit card habits affect it, and how you can build a good score over time.

What is Your CIBIL Score?

Your CIBIL score is a three-digit number, usually ranging from 300 to 900, that shows how responsible you are with borrowed money. It is created by TransUnion CIBIL, one of India’s leading credit information companies, which collects and maintains records of your credit history.

Why Your CIBIL Score Matters

This score is crucial because it helps banks and other lenders decide whether to offer you a loan or a credit card. A higher score tells them that you are likely to pay back money on time, making you a trustworthy borrower.

• Easier Access to Loans: A good CIBIL score makes it easier for you to get home loans, car loans, personal loans, and new credit cards.
• Better Interest Rates: Lenders often offer lower interest rates and better terms to people with high scores, saving you money in the long run.
• Faster Approval: Applications for credit can be approved more quickly if you have a strong CIBIL score.

Essentially, a good CIBIL score opens doors to better financial opportunities for you.

How Your CIBIL Score is Calculated (Simplified)

Your CIBIL score is not just a random number; it is carefully calculated based on several important pieces of information from your credit report. Here are the main factors that influence it:

• Payment History: This is the most important factor, looking at whether you pay your bills on time.
• Credit Utilisation: This checks how much of your available credit you are actually using.
• Length of Credit History: How long you have been using credit responsibly.
• Types of Credit: The mix of different loans and credit cards you have.
• New Credit Applications: How often you apply for new credit.

Each of these factors contributes to your overall score, showing lenders a complete picture of your borrowing habits.

How Using Your Credit Card Affects Your CIBIL Score

Credit cards can be very useful tools, but how you manage them has a big impact on your CIBIL score. Understanding these effects helps you use your cards wisely.

Paying Your Bills on Time (Payment History)

This is the single most important factor for your CIBIL score.

• Always Pay on Time: Making your payments by the due date shows you are reliable.
• Late Payments Hurt: Even a single late payment can significantly lower your score and stay on your credit report for a long time.
• Full Payment is Best: While paying the minimum amount keeps your account current, paying the full balance prevents interest charges and is better for your financial health.

How Much Credit You Use (Credit Utilisation Ratio)

Your credit utilisation ratio is the amount of credit you are using compared to your total available credit.

• Keep It Low: It is generally recommended to keep this ratio below 30%. For example, if you have a credit limit of ₹100,000, try to keep your outstanding balance below ₹30,000.
• High Utilisation is a Red Flag: Using a large portion of your available credit might suggest to lenders that you are over-reliant on credit or facing financial difficulties, which can lower your score.

Applying for New Credit Cards

Each time you apply for a new credit card or loan, a ‘hard inquiry’ is made on your credit report.

• Temporary Dip: A hard inquiry can cause a small, temporary dip in your CIBIL score.
• Too Many Applications: Applying for many credit cards in a short period can make you seem desperate for credit, which is a negative sign for lenders and can significantly harm your score.
• Apply When Needed: Only apply for new credit when you genuinely need it and are confident you will be approved.

The Types of Credit You Have

Having a healthy mix of different types of credit can be beneficial.

• Credit Mix: This refers to having both secured loans (like a home loan) and unsecured loans (like a credit card or personal loan).
• Demonstrates Versatility: Managing different types of credit responsibly shows lenders that you can handle various financial commitments, which can positively influence your score.
• Avoid Too Much of One Type: Having too many credit cards, for example, without any other type of loan, might not be as beneficial.

The Impact of Closing a Credit Card on Your CIBIL Score

You might think closing a credit card is a good idea if you are not using it, but it can sometimes have an unexpected effect on your CIBIL score.

Reducing Your Available Credit

When you close a credit card, your total available credit across all your accounts decreases.

• Higher Utilisation: If you still carry balances on your other credit cards, closing one can instantly increase your credit utilisation ratio, even if your spending habits haven’t changed. As we learned, a higher utilisation ratio can negatively impact your score.

Shortening Your Credit History

The length of your credit history is an important factor in your CIBIL score.

• Oldest Accounts Matter: Your oldest credit card accounts contribute positively to the average age of your credit history. Closing an old, well-managed account can shorten this average, potentially lowering your score.

When Closing a Card Might Be Okay

While caution is advised, there are situations where closing a card might be reasonable:

• High Annual Fees: If a card has high annual fees and you rarely use it, closing it might save you money.
• Too Many Cards: If you have many cards and want to simplify your finances, closing a newer card that doesn’t have a long history might be less impactful.
• Transferring Limits: Sometimes, you can ask your bank to transfer the credit limit from the card you wish to close to another card you hold with them, which can help maintain your overall available credit.

Always weigh the pros and cons carefully before closing a credit card.

How Cash Withdrawals from Your Credit Card Affect Your CIBIL Score

Using your credit card to withdraw cash, often called a ‘cash advance,’ is generally not recommended and can have several negative consequences for your financial health and CIBIL score.

High Costs and Fees

Cash advances are one of the most expensive ways to borrow money using a credit card.

• Immediate Interest: Unlike regular purchases, interest on cash advances often starts accruing immediately from the day of withdrawal, with no interest-free period.
• Transaction Fees: You will also typically pay a hefty fee for each cash advance transaction, usually a percentage of the amount withdrawn.

Signalling Financial Difficulty

Lenders may view cash withdrawals from a credit card as a sign of financial distress.

• Red Flag: It suggests that you might be struggling to manage your finances and need quick cash, which can be a red flag on your credit report. This perception can make lenders hesitant to offer you credit in the future.

Impact on Your Credit Utilisation

Every cash withdrawal immediately adds to your outstanding balance.

• Increased Utilisation: This directly increases your credit utilisation ratio, which, as discussed, can negatively affect your CIBIL score. High utilisation signals higher risk to lenders.

It is always better to explore other options, such as a personal loan, for cash needs rather than taking a cash advance from your credit card.

Building a Healthy CIBIL Score Over Time

Building and maintaining a healthy CIBIL score is a continuous process that requires responsible financial habits.

Regularly Checking Your Credit Report

It is wise to review your CIBIL report periodically.

• Annual Check: You are entitled to a free full credit report from TransUnion CIBIL once a year. Make sure to use this opportunity.
• Spot Errors: Check for any inaccuracies, errors, or suspicious activity on your report. Mistakes can happen, and they could be negatively affecting your score.
• Dispute Inaccuracies: If you find any errors, dispute them immediately with CIBIL and the lender. Correcting these can help improve your score.

Practising Responsible Credit Card Use

Your everyday credit card habits are the foundation of a good CIBIL score.

• Pay on Time, Every Time: Set up reminders or automatic payments to ensure you never miss a due date.
• Keep Utilisation Low: Try to keep your credit card balances well below 30% of your credit limit.
• Avoid Unnecessary Applications: Only apply for new credit when you truly need it.
• Use Credit Wisely: Think of your credit card as a convenient payment tool, not an extension of your income. Only spend what you can comfortably afford to pay back.

Seeking Expert Advice When Needed

If you find yourself struggling with credit card debt or understanding your CIBIL score, do not hesitate to seek help.

• Financial Counsellors: Reputable financial advisors or credit counsellors can provide guidance on managing debt, improving your credit habits, and understanding your credit report better.
• Early Intervention: Addressing financial challenges early can prevent them from becoming bigger problems and help you stay on track towards a healthy CIBIL score.

By following these guidelines, you can build a strong CIBIL score that will support your financial goals for years to come.