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 and to maintain a good credit score.
Most of us have a credit card and a few of us know how to use them well. Knowing how to use your credit cards can be very beneficial for you and can prevent issues in the future.
If used wisely credit cards are a great financial enabler and can be good assets to you. On the other hand not knowing how to manage your cards wisely can lead to many downsides including high-interest costs and credit score downgrades. Using a credit card has a direct influence on the most important factors that go into in your credit score. So getting a credit card and using it regularly and responsibly is one of the quickest and most effective ways to build or rebuild your good credit score. Follow these guidelines for effective credit card use.
Never carry a balance on your credit card: This is the ground rule of using a credit card. Well, most of the people fail to understand that credit cards have a skyrocketing interest rate and it is, after all, a loan in disguise! The more you delay your credit card payment, the more your bank would make by charging you the high-interest amount.
You pay two charges in the case of late payment:
1) Late payment penalty or fees
2) Interest charges on the due amount, which is charged on the unpaid portion.
This makes carrying a balance on your credit card very expensive. Avoid paying interest on your credit card amount by making the paying the payment on time and earning rewards for it!
Late payments negatively impact your credit report score: As you progress in life, your needs increase so your aspirations. Some of the essential utilities in life such as buying a home might need a loan in the future. Or you might need a personal loan to counter an unforeseen situation or you might want a car loan. Before your loan request is approved by a bank or a finance company, your credit history is taken into consideration. Pay your credit due on time or otherwise delay in payments will remain on your credit report and affect your credit score negatively. Lower credit score will be detrimental when you want new loans
Paying the minimum amount shouldn’t be a habit: Try to clear the maximum amount of your credit card balance every month. Just paying the minimum amount every month will increase the duration of your payments as well as heavy interest will be charged on the remaining dues. To clear your debts quickly, pay as much as you can. This will also have a lesser impact on your credit history report.
Use credit card for your necessities, not for borrowed lifestyle: The common mistake made by many credit card holders is that they see it as an easy tool to buy what they desire but might not afford. Though a borrowed lifestyle might make you happy for a short period of time it can get you in trouble as it will increase your debt. Accept that you can’t afford a premium product or luxury and chances are you might not be able to pay for it even after 50 days of taking the credit.
Treat it like a debit card: One potential danger of credit cards: Your bank account balance doesn’t change when you make purchases. It’s only when you pay your credit card bill that money comes out of your account. So if you’re not careful, you can lose track of how much you’re spending. It’s always wise to keep a budget, whether you’re using credit cards or not, so you know how much you have available to spend. Treat your credit card like a debit card, spending only what you know you will be able to pay in full when the bill comes. The more focused you are on spending within your means, the easier it will be to avoid carrying a balance and paying high interest.
Keep your credit utilization 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.
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.
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.
Read the ‘credit card policy’ carefully: With most of the credit cards now being applied online, people often skip reading the terms and conditions or policy agreements. Therefore, many of them fail to realize that not credit cards are same. Their interest charges, benefits, reward schemes and other actions differ based on various banks. Before taking a credit card, go through all available options that offer the lowest interest rate and best rewards program.
Keeping tabs: Analyse your spending patterns with the monthly statement. Determine if you are overspending anywhere. Using the card wisely helps build your CIBIL score. It will help you get loans if you ever need it in future. A lot of people tend to use their credit card to pay off their bills to maintain a record of expenses.
Check on cash back options: Some credit cards offer cash back on certain utility payments. For example, for a Rs 1000 telephone bill paid or movie tickets bought, you may receive cash back of 4-5%. You can make complete use of this and save some money.
Maximize your rewards: On purchasing at some specific shopping centres or supermarkets, booking plane tickets or paying for a movie using a credit card can earn you great rewards. However, it is important to know if your bank converts those rewards into money and gives you cash back. If you make good choices while selecting your credit cards you can actually get paid for spending.
It is important to realize credit cards can be double edged swords and can cut both ways. If managed wisely they are an asset else can turn into a big liability. The rule of thumb should be to not exceed 30% of your credit limit on the credit card.
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