Your credit score is more than just a number; it depicts your creditworthiness to the lenders and can help unlock various opportunities in your financial journey. Whichever loan or credit product you avail affects your credit score. Since a credit card is among the most used credit instrument, it has a significant influence on your CIBIL score. So it can either enhance or degrade your scores depending on how you use.
Why it is important to have a good credit score?
A credit score or CIBIL score is a numerical representation of your creditworthiness that ranges between 300 to 900. Lenders, whether for mortgages, car loans, or credit cards, use this score to evaluate the risk of lending money to you. A higher credit score typically means lower interest rates, better loan terms and also makes it easier to satisfy the credit card eligibility criteria. A good credit score not only facilitates access to credit but also reflects responsible financial behaviour.
How does a credit card help you build a credit score?
A credit card can be an effective tool for establishing and improving your credit score. When used responsibly, it demonstrates that you can manage credit effectively. Here is how credit card usage impacts your credit score.
- Having a credit card contributes to your credit holdings, one of the factors that influences your credit score. Banks and credit card issuers like to see a diverse range of credit types, and a credit card adds a revolving credit line to your profile.
- Your payment history heavily influences your credit score. Timely payments on your credit card bills contribute positively to this aspect and shows your reliability as a borrower.
Tips on using your credit card for building credit score
- Use your card conservatively: It’s quite tempting to max out your credit card, especially in cases when you have a high credit limit. However, using your card conservatively helps you building a positive credit history. Try to keep your credit utilisation below 30% of your credit limit. This not only helps your credit score but also ensures you are not accumulating debt that becomes difficult to manage.
- Pay your bills on time: Timely payments are the fundamental requirements of a good credit score. Set up reminders or automatic payments to ensure you never miss a due date. Late and defaulted payments can significantly harm your credit score.
- Monitor your credit card statements: Review your credit card statements regularly to identify any discrepancies or unauthorised transactions. This not only safeguards your finances but also allows you to address issues timely and prevent negative impacts on your credit score.
- Avoid opening multiple credit cards at once: While having multiple credit cards can diversify your credit mix, opening several accounts in a short period can be perceived as risky behaviour. It’s advisable to avoid multiple credit applications to maintain a positive credit profile.
Conclusion
Your credit card can significantly impact your credit score and financial health if not used judiciously. However, strategically planning your card uses and timely repaying your dues can surely help you generate good credit scores. Remember, responsible credit card management is not just about spending and paying bills; it’s about building a solid credit foundation that will serve you well in various aspects of your financial journey.
