Using your credit card for regular spends and ensuring timely and full repayment of outstanding dues helps in building a good credit score.
Using a credit card is equivalent to taking a loan since it’s the card issuer who pays for you and you repay the amount. Being a credit, credit card transactions are reported to credit bureaus who then use it to evaluate your credit score. Given that credit score reflects your creditworthiness and repayment behaviour, how you handle credit cards is what ultimately determines its impact on your credit score.
Radhika Binani - Chief Product Officer, Paisabazaar.com told Moneycontrol that using your credit card for regular spends and ensuring timely and full repayment of outstanding dues helps in building a good credit score. “Make sure your credit utilisation ratio doesn’t exceed 30-40% of your credit limit regularly. Lenders usually hesitate to lend to borrowers who frequently breach this mark. You may also consider increasing the credit limit for lowering your credit utilisation,” she added.
Here are 5 things you need to follow cautiously while making transactions through credit cards on monthly basis.
Pay your dues on time: Your repayments, be they credit card bills or loan EMIs, form the backbone of your credit score. So it is extremely important that you pay your outstanding balances on time every time. Every time you miss your payment, your credit score takes a hit. Every time you repay on time, your credit score goes up.
Pay your bills in full: As much as possible, pay your entire credit card dues every time before the due date. If you cannot pay the entire amount for whatever reasons, try to pay the maximum you can and not just the minimum amount. For one, the interest on the credit card is very high interest on the unpaid amount, thereby increasing your repayment burden. Second, it also gives an impression of being credit-hungry.
Keep your credit utilization low: Credit bureaus look at how you are utilizing your credit. So, use only part of your credit limit.
Navin Chandani, CBDO, BankBazaar.com says a 10-30% utilisation is usually considered ideal. For instance, if your credit limit is Rs 100000, use just Rs 20000-30000 a month on it. This would make you look like someone who uses credit in a responsible manner. “This is where multiple cards help you by spreading your spending across cards. Your other lines of credit apart from credit cards also have a significant impact on credit score. Too much debt can mean substantially higher EMIs, which can make it difficult to keep up with monthly payments. These missed payments will lower credit score. The lower your debt, the easier it will be to maintain a good credit score,” added further.
Keep your credit inquiries low: Each time you apply for a credit product – a credit card or a loan – a query goes to the credit bureau and your credit score takes a small hit. So do not apply randomly for cards or loans. Chandani said one should do their research properly, narrow down the most relevant offer with the highest potential for approval, and then apply for it. “Each new credit account also lowers your average credit age, and therefore your credit score. So refrain from opening new credit accounts one after the other,” he said.Check your credit report: Requesting your credit score directly from the credit bureau is considered as a soft query and does not affect your credit score. “Checking your credit score regularly ensures that no discrepancies or errors are reported, and your credit score genuinely reflects your financial behaviour. The sooner you have a view into this, the sooner you can correct your course in case of any issues,” said Chandani.