The struggle with improving a credit score is not new. A large number of people tend to underestimate the effect of their financial decisions on their credit reports. However, when they are unable to get a personal loan or a home loan on the account of a poor score they take control immediately.
There are many ways to improve credit score. However, the simplest and easiest way is usually believed to be credit cards. So, if you are going to apply for a new one then it’s natural to wonder if it would help in improving your score. The answer is both “yes” and “no”.
A new credit card can help improve your credit score and credit report if:
Your repayment behaviour has the biggest impact on your credit score. So, if you will pay your credit card bills on time then you can indeed improve your score to a great extent. However, if you are unable to keep up with the payments, then not only you will not improve your score, you can damage it even further.
It’s important to understand that when it comes to credit score calculation, then even a single late payment can be harmful to your credit report. So, if you are going to get a new credit card, then be sure to stay on schedule. Put reminders on your phone if you have to, but do everything possible to pay the bills on time.
When you want to make the things right in your credit report, then you have to be more responsible towards your credit usage. That brings us to the concept of “minimum payments”.
Most of the credit card providers give their users the option of making “minimum payments” for their monthly bills. These are usually an extremely small portion of the actual bills (2% to 4%).
Now, the idea of having to pay just Rs. 1,000 for a bill of Rs. 50,000 and avoiding fines and penalties at the same time can surely sound great. However, this can cost you your credit score. The reason behind this is that when you make a minimum payment the remaining balance of the bill is carried over to the next month and it increases the debt.
By consistently making minimum payments only you can end up with an insurmountable debt that’s almost impossible to get off your shoulders. Not only this can lead to high level of stress but can totally wreck your score as well.
Apart from your repayment history, the variety of credit in your report usually has the maximum contribution in the score calculation. So, if currently your score is based on the repayment of just a personal loan or a car loan, then getting a new credit card can certainly give it a boost. On the other hand, if your credit history is all about credit cards then perhaps getting a new one won’t do much.
The credit utilization ratio is the amount of your combined monthly balance on all credit cards divided by the sum of each card’s limit. It’s usually expressed as a percentage.
So, if you have two credit cards with Rs. 1 lakh limit on each, and you make purchases worth Rs. 1 lakh (using Rs. 50,000 from each card) on average per month, then your credit utilization ratio would be 50%.
If you want to improve your credit score when you should keep the utilization ratio below 35%. Considering the example above, since your ratio is 50% which is bad for your score, getting a new credit card can solve this problem.
Say, you get another credit card with a Rs. 1 lakh limit, then your total limit becomes Rs. 3 lakhs (Rs. 1 lakh from each card). However, if your average monthly balance is still Rs. 1 lakh, then your new ratio becomes:
1 lakh/3 lakhs = 33%
So, in this way you can lower your utilization ratio and increase your score.
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