Even Good Money Habits Have Bad Side Effects
Credit sometimes works in many contradictory and mysterious ways. Many people think that if they use their money the right way and follow good money habits, then their credit score can increase. However, this is not how it works every time. In spite of you following the best ways and having the best intentions, there are some smart financial ways that are not always the best credit ways. Read on to find out how some good money habits can hurt your CIBIL score drastically.
1. Not using credit cards
Some people think that if they do not use credit cards at all, they are taking a smart decision and playing it right. They think that this way they can keep away from debt and never have to worry about the risks of possessing a credit card. Yes, they are right at some point, because if you do not make payments on time and in full, you can get trapped in a huge debt trap that is difficult to flee.
However, if you stay away from credit, then you cannot build your credit. This means that you cannot get a credit, when you need it, such as for a car loan or mortgage. Plus, you need to have credit for other things too that are not related to credit. For instance, when you apply for a rented apartment, the landlord will look at your credit report. Moreover, some employers also check the credit report of an individual before appointing him or her to their office.
Therefore, it is advised to build your credit responsibly. You can just go for a standard credit card and not carry any balance on your credit card account. However, if you are still afraid, you can opt for a secured credit card, become an official user on the credit card of someone else, or apply for a credit card with a low limit. These are some of your options, if you want to start with your credit and do not want a traditional credit card.
2. Closing an old credit card
Do you know that closing your old credit card can lower your CIBIL score? Yes, it is true. Your credit history is an essential part of your credit score. This means the duration of your credit accounts; the more it will be the better credit score you will have. Therefore, you must keep your old credit card account open and check it periodically.
3. Refusing a higher limit of credit
Most of the people, who are financially responsible, do not prefer a high credit limit. They reject it as they think that it is a great financial move. Plus, they can get tempted to use the extra credit, so better to stay away from it.
However, this responsible move can actually lower your credit score, owing to the credit utilization ratio. This is the proportion of credit amount that you use and the credit amount that is available to you. For instance, if you have a credit limit of Rs. 1,00,000 and you have a debt of Rs. 10,000, then your credit utilization ratio will be 10 per cent. The lower the credit utilization ratio will be, the higher your credit score will be.
Apparently, you can have a less credit utilization ratio by having a lower debt. One other way to boost it is by having a high credit limit. For instance, if your credit card limit is Rs. 2,00,000, then your credit utilization ratio will drop to 5 per cent, thus increasing your CIBIL score.
These are some of the good money habits that can hurt your credit score. Make sure that you do not use them and thus keep your CIBIL score high.