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The Relationship Between Credit Cards, CIBIL Score, and Loans

The Relationship Between Credit Cards, CIBIL Score, and Loans
Jay Kaul
Written by Jay Kaul

A Financial Love Triangle

Apply NowThe financial state of many of the present day individuals is vastly different from what it was a decade ago. When compared to finances of people before, a majority now survive solely on credit, which is mostly in the form of overdrafts or loans taken on credit cards.

Credit card, which was a luxury before, is now a common possession among many. The credit (pardon the pun) goes to the financial and banking institutions, which have created a host of products that meet with the different credit needs of customers. Suffice to say, the credit cards are the result of our desire to shell out money to boost our lifestyles.

Loans, which people received, depended on the personal status they had in society. But now credit is much more than the relationship that an individual has with a financial institution.  Lenders are now more serious about earning money than forging strong bonds with their customers. Thus it is the CIBIL score that they depend on to assess the eligibility of an individual for credit. The CIBIL score as a result has become a crucial asset of financial industry.

CIBIL score and debt

CIBIL score and debt both depend on each other. To receive credit, an individual should have a good CIBIL score and the score is not possible without a debt history. This may be confusing, but when you look at it closely you will understand the relationship more clearly.

An individual can gain a CIBIL score only when he or she has a debt at present or had in the past. An individual gets a CIBIL score, when there is a credit history of minimum 6 months and without a debt it is not possible to get a CIBIL score.

How banks approve loans

Banks or financial institutions accept loans or credit applications based on the CIBIL score alone. So, you have to be in debt first to be eligible for a loan.  Thus CIBIL score, debt and loans have a symbiotic relationship with each existing solely because of the other.

CIBIL score is assessed by the manner in which a debtor tackles loan and credit card payments. Late payments bring down the CIBIL score significantly. Banks are cautious in such a situation and do not accept a loan application easily.

To turn the entire process into your favor, you need to have a proper mix of unsecured and secured debt. This gives you a good CIBIL score, as it shows that you have collateral on your loan and intend to pay the loan back, instead of being a greedy debtor. Banks prefer offering loans in such situations alone.

Personal loan vs. credit card loan

Debt in form of personal loan to boost your CIBIL score is not a good idea, as the interest rates are quite high. But such loans have multiple benefits. You can purchase an expensive home appliance, fund a family trip or see to the credit card payments too.  The last purpose will actually favor the CIBIL score you have.

This solution works only when the interest rate on personal loan is less and when you have a huge accumulated due amount on your credit card.  Make sure you do not default on the repayment of personal loan, which can lower the CIBIL score.

But remember that personal loans are expensive and if you have a credit card that lets you have a credit history and a reasonable CIBIL score, it is not necessary for a personal loan. And such unsecured loan instruments can affect the credit score too.

So, if you are looking for increasing your CIBIL score availing a credit card would be a good option as against a personal loan. It will set you on the proper credit trail provided you are prompt on the due payments.

About the author

Jay Kaul

Jay Kaul

Jay is a financial and credit expert and freelance contributor to CreditSmart. He's always keeping his eyes open for the latest credit card trends in India and provides a sharp insight on new entries into the market.

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