How do Credit Cards Help Improve and Maintain Your Credit Score?

by MyMoney Mantra FinTech (Financial Technology)

Whether you are a shopaholic or make regular purchases, having a credit card offers you one of the fastest ways of purchasing without getting anxious about a cash crunch. 

With the availability of so many plastic cards, the lenders are keen to offer you instant access to credit at your fingertips. The use of credit cards helps you to make prompt payments which, in turn, carry a positive impact on your credit score over a period. Often lenders reward credit conscious consumers by raising the credit limit which allows you to achieve your financial goals by just swiping the card instantly.

However, at times the users often blame on credit cards for their poor credit score and making them fall into a debt trap. But this does not hold true far from the reality itself which results through a lack of financial discipline and self-control in managing finances. A well-chosen credit card as per your desired needs is an effective tool for helping you increase your credit score.

This article throws light in many possible ways where you can use your credit card to build or improve your credit score.

Build your credit history using credit card

Lenders consider lending to those who have already taken a loan or credit card before, provided which permits them to examine the applicant’s repayment capacity and risks associated with it.

But obtaining a loan to build your credit history is not recommended as it comes with interest and other related costs involved.

The ideal method of building your credit history without incurring a cost is by getting a credit card for yourself. Unlike loans, you don’t have to pay any interest cost on credit cards as long as you settle your outstanding dues in full amount in time or do not opt for EMI or loan option. Besides zero-cost finance, credit cards provide additional benefits such as cashback, reward points, discounts, etc. If selected and managed well, the credit card benefits can supersede their cost by a vast margin.

Those who cannot get a regular credit card can go for a secured credit card to build their credit history. These credit cards are issued against fixed deposits that go up to 85% of the principal being provided as a credit limit.

Pay your credit cards bill by due date

The credit card bureaus get credit card transactions report from the credit card issuers to calculate or update credit score.  While non-payments or defaults and subsequent delays in payment causes a reduction in credit score, continuous repayments of the full bill amount by the due date is viewed as a positive feature and can cause a regular increase in the credit score. However, it is advisable to use your credit card for the expenses that can be repaid by the due date. You can also convert some of your credit card dues in part or full into EMIs if you have a heavy card outstanding to be repaid by the due date.

Optimise your credit utilisation ratio within 30%

The credit utilisation ratio is the total credit limit exhausted by you. Lenders often consider lending to those having credit utilisation within 30%.The applicants with a higher credit utilisation ratio are viewed as credit hungry and riskier by the lenders to lend. If your credit limit goes beyond 30% limit, chances are such that your credit score would be reduced by the credit bureau while those who have used below 30% limit have lower ratios and will get a higher score.

Hence, always focus on restricting your credit utilisation ratio within 30%. You can also ask to raise your credit limit from your existing credit card issuer if your credit utilisation ratio regularly exceeds 30%. You may also go for an additional card if your request for raising the credit limit gets declined by the existing credit card issuer. 

Avoid multiple credit card applications within a short period

When you apply with multiple card applications within a short period, your credit score will be reduced by a few points. When you apply with a credit card application, card issuers will take your credit report from the credit bureaus to examine your creditworthiness. This is considered as a hard enquiry and would contain in your credit report, with each of them minimising your score by a few points.

 With such enquiries issued by card issuers are hard enquiries will reflect in your credit report, with each of them pulling down your credit score by a few points.

It is better to visit an online financial marketplace where you can make comparisons of various credit card offerings rather than applying directly with multiple credit card issuers. You can also fill the enquiry form with the online financial marketplace which helps them to fetch your credit score and such requests are taken as soft enquiries which do not affect your credit score.

Plan, purchase and anticipate your credit card expenses

Decide your monthly purchases which you would do with your credit card. Anticipate your credit card expenses which are also essential to attain your financial goals. You can also factor in any upcoming big purchases such as home appliances or gadgets. Before using your credit card, decide whether you would like to avail a consumer durable loan subject to the interest rate. Though various lenders will have different interest rates, these are relatively lower to the interest rates on credit card balances. This will also help you maintain your credit card limit which you can be useful in emergency cases.

Go for zero percent interest charged credit cards

Mull over a large purchase or instant holiday package that can be covered within the utilisation limits of your credit card. A zero percent interest card provides with no-cost EMI’s on stipulated large purchase items on several online marketplaces where the discounted interest amount comes from the price of the order. It is easier to make repayments and lower down the chance of a missed payment and further brings down any likely impact on your credit score. However, you may read the fine print carefully and make sure the “zero percent interest card” does not contain any hidden charges such as processing or transfer fees and annual fees.

Look over for promotional emails and messages from your credit card provider

It is during public holidays and festivals, lenders come up with special offers. With a little homework, smart planning and advance booking you can consider saving some amount with your credit card. The effective use of your credit card will help you build a good credit standing as long as you are responsible for repaying the full amount on time. For example : you may get a promotional email from your SBI bank to choose from amongst SBI Credit Cards to collect the gift voucher offer worth Rs. 3,000 from selected brands. If you are an SBI Prime Card member, it is likely you may use this option at the specified brand outlets.

Close your credit card with care

Credit bureaus factor determines the average age of your credit facilities which consist of your credit cards and loans while calculating your credit score. Hence, once you close your old credit card will bring down the average length of your credit facilities that will reduce the credit score of the borrowers as well. Furthermore, your credit card closure also brings down your total credit limit. If a reduced credit limit causes the credit utilisation ratio to go beyond 30%, it can minimise your credit score. If you want to reduce the impact on your credit score upon closure of your credit card, you can ask the other credit card issuers to raise their credit limit.

 At last, your credit health improves with your improved credit behavior. Using your credit card responsibly helps you to create and build positive creditworthiness. Moreover, you can monitor your credit portfolio cautiously, and track your CIBIL Score and report constantly to ensure you are eligible for the credit whenever you need it the most.

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About MyMoney Mantra Freshman   FinTech (Financial Technology)

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Joined APSense since, September 22nd, 2017, From New Delhi, India.

Created on Feb 24th 2020 01:32. Viewed 602 times.


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