How multiple credit accounts impact your CIBIL score?

Aditya Kumar

Wondering if your credit score will take a beating if you have multiple credit cards or too many loans? How many credit cards or loan accounts will label you as a high-risk customer and affect your approval chances? Well, let’s find out.

For starters, merely having 2-3 credit cards or 2-3 loan accounts isn’t going to be hard on your score from any angle. But opting for too many cards, and triggering too many credit inquiries by applying for one too many loans can be quite severe. Before we go on to determine how impactful multiple credit accounts are on your credit score, let’s look at what parameters essentially impact your score.

Here are the factors that impact your credit score:

Repayment history

Your repayment history has the most dominant impact on your credit score. Consistent repayments on availed credit (on a monthly basis) will help keep your credit score in perfect harmony. Instances of late payments on your credit cards, EMI bounces (on secured or unsecured loans) and defaults essentially have a significantly negative impact on your credit score.

Defaults of course have the biggest impact, with a single instance of default holding the possibility of bringing down your credit score by an incidence of 80-110. If your credit score has been hit for whatever reason, making regular repayments on current loans/credit cards will help improve it. However, this happens over time. According to FICO, your repayment history has a 35 percent weightage on your credit score.

The number of credit accounts in your name

Here is the answer to the all-important question: how impactful can multiple credit accounts be? Well, the number of credit accounts and the amount you owe has a weightage of roughly about 30 percent. So technically, this parameter holds the second biggest weightage in percentage terms. What needs to be importantly understood here is that having multiple credit cards or more than one loan to your name will not by itself bring your credit score down.

If you have an above average income level and have three credit cards to your name, you are not going to necessarily see your credit score drop. However, if your credit utilisation is high on your credit cards – higher than 60 percent of your total available limit on all three cards put together, there’s reason for concern.

A high credit utilisation ratio means that you are a high-risk borrower, and with your given income level (even if above average), there is a decent probability of making late payments or defaulting on your monthly payments on one or more of your cards, thereby negatively impacting your score. There’s more to worry if you have maxed out your cards. This would essentially mean that most of your income would be exhausted in making credit card repayments, giving creditors an indication that you are a high-risk borrower.

The same is true with multiple loan accounts, or a combination of loan and credit card accounts. A situation like this would mean that most of your monthly income would go into making repayments on your debts, an event that will reduce the probability future approvals and be quite damaging to your score.

Length of your credit history, types of credit and new credit availed

These three parameters make up for the remaining percentage: the length of your credit history influencing 15 percent, type of credit 10 percent, and new credit 10 percent. As such, types of credit and new credit don’t have too much of an impact. Late payments and defaults have a more severe impact on credit scores in the case of secured and unsecured loans than in the case of credit cards. A default on a credit card isn’t going to be near as impactful as a default on a home loan.

Technically, it’s a vicious cycle. Having too many credit accounts would prompt a disposition to avail new credit more frequently to make payments towards already existing credit accounts. This leads to multiple credit inquiries, giving lenders the idea that you are a high-risk borrower. Too many inquiries with the bureau negatively impacts your score, leading to rejections, which have an even larger impact. So, stay away from multiple accounts, my friend!

Your score will not be hurt as long as you are able to manage your credit accounts effectively by having a healthy credit utilisation ratio on your credit cards and a healthy monthly debt-to-income ratio by making consistent repayments and avoid instances of late payments and defaults.

The writer is Founder & CEO of Qbera.com