A disciplined usage of credit card can play an enabling role in building a good credit score, without incurring interest cost as in the case of loans.
Credit card issuers have to report your card transactions to the bureaus, which in turn factor them while calculating your credit score. Hence, a disciplined usage of credit card can play an enabling role in building a good credit score, without incurring interest cost as in the case of loans.
Here are some top credit card moves that will help you in doing so:
Ensure regular and timely repayment of credit card bills
Repayment of credit card or loan dues by the due date is said to receive the maximum weightage among all factors considered while calculating your credit score. Hence, timely repayment of your credit card dues can steadily build your credit score, and thereby improve your future loan and credit card eligibility.
If you are facing difficulties in repaying your credit card bill by the due date, consider converting it or a part of it into EMIs. Doing so would not only preserve your credit score but also save you from incurring hefty finance charges and late payment fees. Finance charges of unpaid credit card dues can range anywhere from 24-49% p.a. while the late payment fee of up to Rs 1,000 is charged on failing to repay the minimum amount due mentioned in the credit card bill. The interest cost of EMI conversion is not only significantly lower than finance charges, they also come with tenures of up to 5 years. This will enable repayment of dues in smaller tranches as per your repayment capacity, without impacting your credit score.
Contain your credit utilization ratio within 30%
Credit utilization ratio (CUR) refers to the proportion of your total credit card limit used by you. Given that lenders generally consider credit card users having CUR above 30% as a sign of being credit hungry, credit bureaus tend to reduce your credit score by a few points on breaching this mark. Therefore, make sure to restrict your CUR within 30% to avoid harming your credit score. Those frequently breaching this mark can either request their lender to raise their credit limit or opt for an additional card. Doing so will bring down your CUR, provided you do not end up increasing your credit card spends after getting a higher credit limit.
Do not submit multiple enquiries to lenders
As soon as you directly submit a loan or credit card application, lender fetches your credit report from the credit bureau to assess your creditworthiness. Such lender initiated credit report requests are termed as hard enquiries, each of which gets listed in your credit report and drops your credit score by a few points. Thus, making loan enquiries with multiple lenders within a short span will significantly reduce your credit score.
Instead of submitting multiple credit enquiries directly to the lenders, consider visiting online financial marketplaces for choosing the optimal option after comparing various loan or credit card options available on your credit score, income and other eligible criterion. Credit report requests initiated by such platforms are treated as soft enquiries by the credit bureaus and thus, do not impact your credit score.
Periodically review your credit report
Your credit score is primarily calculated on the information provided by the lenders and card issuers. Hence, any wrong information listed in your credit report, either due to clerical errors from the end of lender/card issuer or due to fraudulent credit transactions in your name, can adversely impact your credit score. The only way to spot such wrong information is to fetch your credit report at regular intervals. Hence, fetch your free credit report from each of the credit bureaus at least once in a year. Alternatively, visit online financial marketplaces to get free credit report and their monthly updates.
Avail secured credit card, if denied a regular one
Not all credit card issuers issue credit cards to ‘new to credit’ consumers, i.e. those who do not have a credit history. Many also fail to avail credit cards due to their insufficient income, job profile, employers’ profile and even due to their unserviceable locations. Such customers can consider availing secured credit cards, issued against the fixed deposits submitted as collaterals. These cards too have similar features and benefits as the regular ones, such as the provision of interest free period, reward points, cash back offers, discounts, etc. As the transactions made through secured cards are reported to the credit bureaus as well, a disciplined usage of these cards as stated above can help their users in a building a strong credit score over the time.
(The author is Director & Group Head-Investments, Paisabazaar.com)