Why Your CIBIL Score Might Drop After Getting a New Credit Card

As a 27-year-old software engineer based in Mumbai, Rahul handled his finances primarily through salary funds and digital payments. 

He decided he needed a credit card after seeing his team members receive cashback and reward points using their credit cards; he thought, "Mujhe bhi ek lena chahiye!"

With a CIBIL score of 780, he confidently applied for his first credit card. A week later, he checked his credit score, which showed a dramatic decrease to 750 "Arrey, yeh kya ho gaya?" He panicked.

Further investigation revealed the following explanations:

• Hard Inquiry Effect: When Rahul applied for a credit card, the bank pulled his credit report. This "hard inquiry" temporarily reduced his CIBIL score.

• New Credit Account Impact: Since this was his first credit card, his credit history started from scratch. A short or new credit history can initially lower the score.

• Credit Utilisation Spike: Rahul got a limit of ₹1,00,000, and in excitement, he spent ₹40,000 on gadgets. His credit utilisation stood at 40%, which is higher than the ideal of 30%, and that caused a slight decrease.

The best part was that by making his payments on time and monitoring his expenses, Rahul watched his CIBIL score improve during the following months. 

Ab usko samajh aa gaya—credit card lena smart decision hai; bas use bhi smartly karna padta hai!

The Hard Enquiry Hit: When Banks Dig Into Your Past?

Whenever you submit a credit card application, the bank must review your credit report, which results in a hard inquiry. The CIBIL score suffers a significant drop when lenders see too many enquiries within a short time because they consider you as someone who is credit-hungry.

Fact Check:

• One hard credit inquiry will decrease your CIBIL score by 5 to 10 points.
• When you submit three credit card applications within 2 months, your CIBIL score typically declines from 15 to 30 points.
• Your CIBIL score can decrease by as much as 50 points whenever you submit multiple credit card applications within a brief timeframe.
• Hard enquiries can be seen on your credit report for up to 2 years, although their influence declines after 6 months.

For example, Rahul, having a CIBIL score of 780, wanted to avail himself of maximum cashback benefits. He applied for four cards in 45 days. At the time of the final application, his score had gone down to 740, a reduction of 40 points without even using the cards.

Don’t rush credit card applications! You should maintain a 6-month gap between new applications to avoid disturbing your credit score.

Credit History Matters – The Older, The Better!

The duration of your active credit accounts determines your credit age. The older your credit history, the better your CIBIL score. Opening a new credit card decreases your average account age and leads to a minor score reduction.

First Example – The One-Card Holder

Aman has a single credit card that is 6 years old.

• His credit age is 6 years.
• He receives a new credit card, so his credit age:
• (6 years + 0 years) / 2 = 3 years.

A drop in credit age from 6 years to 3 years results in a credit score drop of 5 to 15 points.

Second Example – Having Multiple Credit Accounts

Priya has two credit accounts:

• A personal loan that is 5 years old
• A credit card that is 4 years old
• Her credit age is (5 + 4) / 2 = 4.5 years.
• Adding a new credit card reduces Priya's credit age to:
• (5 + 4 + 0) ÷ 3 = 3 years.

Her credit score could potentially be reduced by 10 to 20 points because of this recent credit age reduction.

How to Reduce the Impact?

1. Leave older credit cards open to preserve a longer credit history.
2. Don't open several new accounts simultaneously, since it significantly reduces your average age of credit.
3. Let your new credit account age naturally to regain lost points over time.

Credit Utilisation Ratio: Use More, Lose More!

A new credit card raises your overall credit limit, but your credit utilisation ratio—how much credit is used out of the total available limit—affects your CIBIL score.

Formula:

(Total Credit Used ÷ Total Credit Limit) × 100

Ideal Utilisation: Keep it below 30% to prevent a score decrease. Increased usage indicates credit reliance, resulting in a possible 10 to 30-point decrease.

Impact of Credit Utilization on CIBIL Score

Applying For Too Many Cards – The "More is Less" Effect

Applying for more than one credit card in a short time frame can ruin your CIBIL score very badly. Every application has a hard inquiry, and multiple applications make lenders perceive you as being hungry for credit. Also, if applications get rejected, it gets even worse.

How It Affects Your Score?

Example:

• Rohit's CIBIL score was 780.
• He applied for 4 credit cards in 3 months, and 2 of them were rejected.
• His score went down to 730 due to rejections and hard enquiries.

How to Avoid This Mistake?

1. Space out applications: Apply for a new card only when required.
2. Check eligibility before applying to prevent rejections.
3. Keep a good credit mix rather than depending on several credit cards.

New Card, New Temptations—Swipe Wisely!

A new credit card gives you more spending power, but it also carries the danger of overspending. If you don't pay your entire bill each month, interest accumulates, resulting in increased debt and a lower CIBIL score.

How Overspending Affects Your Score?

Example:

• Vikas acquired a new credit card with a ₹50,000 limit.
• He incurred ₹40,000 in shopping, expecting to settle it in installments.
• As he only paid ₹5,000, the balance of ₹35,000 began to attract 3% to 3.5% monthly interest (40% per annum).
• His CIBIL score lowered by 20 to 40 points because of high utilisations and unpaid dues.

How to Avoid This Trap?

1. Be true to yourself: Don't exceed your repayment capability.
2. Pay the entire bill: Avoid interest by settling dues each month.
3. Utilise EMI judiciously: If necessary, shift large buys into low-interest EMIs.

Debt Consolidation: Smart Strategy or Risky Move?

Debt consolidation combines your several outstanding debts into a new loan with a single monthly payment and a reduced interest rate to help you lower your financial stress.

Using a new credit card to consolidate debt can be an intelligent financial decision, but only if controlled properly. It serves to cut back on interest fees and make it easier to pay, but misusing it can damage your credit rating.

How It Works with Numbers

Pros of Debt Consolidation

• Lesser interest charges: Transferring high-interest loans to a low-interest credit card reduces costs.
• Simplified payments: One EMI in place of multiple payments.
• Improved credit mix: Varies your credit report, helping your score in the long run.

Cons of Debt Consolidation

• Overusing your new card: High usage (more than 50%) will damage your score.
• Late payments: Payments after the due date on the new card can deteriorate your financial health.
• High-interest danger: If unpaid on time, the interest of the new card can go as high as 36% to 42% per annum.

When is Debt Consolidation a Good Option?

1. If your new credit card charges a lower interest rate compared to your current loans.
2. If you have a well-thought-out repayment plan and won't overspend.
3. If you avoid missing payments and keep your credit score untouched.

Example: How Arjun Gained from Debt Consolidation

Arjun, a 32-year-old IT professional from Pune, had a personal loan of ₹1,00,000 at 18% interest.

Arjun’s Debt Consolidation—Before & After

Bouncing Back: How to Recover Your CIBIL Score?

A dip in your CIBIL score is not irreversible. With good money habits, you can restore it in the long run.

Steps to Boost Your CIBIL Score

Example:

• Ananya's CIBIL score reduced from 780 to 720 owing to excessive spending and delayed payments.
• By lowering usage to 25% and making timely payments, her score regained 770 in one year.

Credit Score Myths—Busting the Biggest Misconceptions!

Most people have misconceptions about CIBIL scores and commit financial errors as a result. Let's bust the top myths:

Conclusion

Having a new credit card is not bad, but knowing its effect on your CIBIL score is important. Rahul's story illustrates how hard enquiries, age of credit, and utilisation can lead to a temporary fall.

However, conscientious usage—making on-time payments, maintaining low utilisation, and not applying in multiple places—can restore the score very soon. A credit card can be a useful tool if used intelligently. Rather than dreading a fall, strategise your credit steps wisely, and eventually, your CIBIL score will improve.

Credit lena zaroori hai; bas samajhdaari se handle karna aur time pe bill bharna equally zaroori hai!

FAQs

• How far does my CIBIL score fall when I take a new credit card?

It can fall by 5 to 10 points because of hard enquiries and reduced credit age, but it comes back if handled properly.

• How soon does the score come back?

With on-time payments and low usage, it can take 3 to 6 months to recover.

• Is closing an old credit card useful for increasing my score?

No, it hurts your score by lowering your credit age and limit.

• Should I not take a new credit card to maintain my score?

Not necessarily. A new credit card can enhance your credit mix if well managed.

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