How do Credit Cards Help Improve and Maintain Your Credit Score?

This post is dedicated to my Indian readers. As the government takes a landmark decision for demonetizing the existing Rs. 500 and Rs. 1000 banknotes, while leaving the use of plastic money unaffected, it is sure to affect the way people look at plastic money. The decision will have a lesser impact on people who already use credit cards and debit cards while greatly affecting those who rely heavily on cash.

Though the use of credit and debit cards has increased in the last few years, a majority of Indians still prefer to transact in cash. While most of the people do not like the idea of using credit cards due to a fear of overspending, some of them shy away from as they believe it would harm their credit history and bring down their credit score.

Additionally, a smaller but a significant number of people are hesitant to apply for a credit card because of news related to data breaches in secure databases that store credit/debit cards and the possibility of credit card fraud.

When used properly, credit cards are very important tools for your personal finance. As it tracks your spending and earns you rewards, whiling giving you the flexibility to spend.

Apart from convenience, credit cards can help you track your spending as you can match your monthly statements with your expenses, offer ease at the time of traveling, while you can also get various rewards and bonuses just by using your card.

Hence for all those of you, who have stayed away from using credit cards believing that having a credit card can affect your credit score and credit history, it is time to re-think.

Credit cards when used with adequate financial discipline will give you greater insight into how you manage your expenses and service your debt thereby help you improve your credit score over a while.

Following are some key things to keep in mind if you wish to build/improve your credit score by using a credit card.

Make the payments on time

How well you service your existing debts (loans and credit card dues)is one of the most crucial elements that affect your credit score.

So if you are using your credit card regularly and paying your monthly dues on time, this is an indication that you are a low-risk borrower and this will help build your credit history thereby helping you gain the trust of prospective lenders.

Thus, ensure that you make your EMI and credit card payments on time as this will boost your credit score in the long term. Many a time, people think paying off their credit card bill or loan EMI in advance will improve their credit score, but that’s not true.

You have to pay on time and in full to ensure that you maintain a high credit score.

Maintain a low credit Utilization Ratio

The credit utilization ratio is another important factor which can help make or break your credit score. Simply put it is the sum of all your credit dues divided by the sum of the credit limits on all your cards is your credit utilization ratio.

The lower this ratio, the better it is. A lower ratio indicates that you are using less credit that the credit limits allocated to you, so you are at lower risk of default. A higher ratio signals overuse of credit and represents a higher chance of default.

You can use this ratio to your advantage by keeping it low consistently (less than 30% is usually considered ideal)and improve your credit score.

Apply for a new credit card or increase your current credit card limit

Going forward, as more and more transactions are done online and more transactions are made through cards, you can opt for increasing your credit limit on your existing card or apply for a credit card in addition to the one you already have.

Getting an increased limit or a new card would increase your overall credit limit, thus helping you maintain a lower credit utilization ratio.

The advantage of getting a new card is that each card offers unique rewards and bonuses, some cards have tie-ups with lifestyle brands or petrol pumps and depending upon your individual needs you can opt for another credit card so that you maximize your rewards as well as maintain a high credit score.

To conclude, if you do not already have a credit card, now is probably the best time to consider applying for a new credit card online as the benefits are aplenty.

Moreover, with a little bit of financial discipline, even a single card can help you build and maintain a high score, which will be an asset if you plan to apply for loans or credit cards in the future.