10 Types of Financial Transactions that Can Harm Your Credit Score or CIBIL Score

Using a credit card or personal line of credit to pay for large purchases and ongoing expenses is still a fairly new concept in India, but one that’s quickly catching on. Used the right way, credit cards and consumer durable loans can be a highly effective part of your financial planning and money management strategy.

Here’s why using credit is actually a good idea:

• You get the flexibility of buying what you need when you need it, rather than waiting till you have saved enough money.
• You can distribute the cost of large purchases over time instead of burning a hole in your pocket with a lump-sum payment.
• You can manage monthly bills and expenses more efficiently, by using credit to pay on time and avoid late fees or
  penalties.
• You also get additional rewards, discounts and other benefits with many loan products, such as MoneyTap’s credit card 2.0.

However, it’s important to be careful with how you use credit, especially with purchases that can potentially harm your credit score. 

What is a credit score? It is a three-digit number that is a major factor taken into consideration when banks or NBFCs are trying to determine your creditworthiness and affects everything from interest rates to credit card limits and loan amounts.

Financial Transactions That May Affect Your Credit Score

While credit agencies don’t go over every detail of purchases you make with credit cards, electronic transfers or personal loans, they may use computer algorithms to determine spending and payment patterns. If you’re seen as a high-risk individual, lenders may not agree to lend you money, or it may be at higher interest rates.

Here are 10 examples of transactions that could have an impact on your credit history and CIBIL score:

• Large Purchases – Buying something very expensive on a loan, like a home or a car, will definitely go on your credit report.
• Late Payments – A history of defaulting on payments for utilities, credit card bills, and other dues does not reflect well on your credit report.
• Multiple Loans – Applying for too many credit cards and small loans at one time is seen as a risk factor, especially if you already have one or more.
• Cash Withdrawals – Frequently using your credit card to withdraw cash hints at money troubles, in addition to incurring very high interest rates.
• High-Risk Signals – Heavy spending on driving tickets or ‘challans’, alcohol, porn, lottery tickets, counselling/therapy, etc. can all make you seem high-risk.
• High Credit Utilisation Ratio – The credit utilisation ratio is a ratio of your outstanding credit balances to the credit limit. If your credit utilisation ratio is not below 30%, it can negatively impact your credit score.
• Any Outstanding Debt – Even a small amount of outstanding debt reflects poorly on your credit report and may reduce some points of your credit score.
• Paying Only the Minimum Amount Due – If you only pay the minimum amount due, you are at the risk of falling into a debt trap. The debt gets rolled over and interest piles up on the outstanding balance. You not only lose money but also lose some of your credit score points.
• Requesting for a Credit Limit Increase Too Often – Frequently requesting for an increase in the credit limit affects your credit score negatively. Because every time you make a request, the bank pulls up your credit report. This inquiry is registered as a hard inquiry capable of harming your credit score.
• Not Having a Credit Mix – A healthy balance of secured loans like home loans and unsecured loans like personal loans indicates that you have a good experience of handling multiple types of credit accounts. 

Even if you don’t want a loan or credit card right now, you may need it in the future, so ensure you are using credit wisely. If you have a low credit score or none at all, you could still get a personal line of credit through MoneyTap. Now only does this help you access small loans for your financial needs, but also start building your credit history for the future.

Why wait any longer for approval? Download the MoneyTap app and apply now!