Using a credit card is equivalent to taking a loan since it’s the card issuer who pays on your behalf and you repay the amount later. Transactions made through a credit card are reported to credit bureaus like CIBIL who then use it to evaluate your credit score. A credit score reflects your creditworthiness and repayment behaviour. How you handle credit cards is what ultimately determines its impact on your credit score. Here are 5 things you need to follow cautiously while making transactions through credit cards:
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 UTILISATION LOW | Credit bureaus also look at how you are utilising your credit. So, use only part of your credit limit. Make sure your credit utilisation ratio doesn’t exceed 10-40% 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. This would make you look like someone who uses credit in a responsible manner.
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. 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.
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.