A credit card can be used for a lot of things. From making utility bill payments to booking plane tickets, and from purchasing expensive goods on EMI basis to meeting urgent money requirements, it can be helpful in many ways. However, there is another thing that it can be used for, which is credit score improvement.
Credit Card and CIBIL Score
A lot of times, when people apply for a personal loan, education loan, etc. they come to know that they don’t have a credit score at all. This usually happens because you need to have a history of credit repayment, which again doesn’t exist because it’s your first loan application ever. So, it’s a textbook catch 22 situation.
Banks are often reluctant to approve a loan when the applicant has no credit score. This is where credit cards can be an ideal solution as they can be easily obtained even when you don’t have a credit report.
So, you can use a credit card for creating a good repayment history and a good score easily.
Even If you have a low CIBIL score, a credit card can help you bring it to a good level.
Is Credit Card a Sure-shot Method for Score Improvement?
A credit card can be of great help when you need to improve your score, but is it a foolproof solution? Not really.
A card will get the desired results only when used properly. In fact, if you are not careful, it can actually damage your score further.
The following are some of the most important things to keep in mind when using credit cards if you want to avoid credit score damage and seek improvement:
Give utmost attention to how you pay your card bills. This is because the repayment history alone will be one of the most important contributing factors to your score.
So, if you will pay your bills on time, then you can easily observe some improvement. On the other hand, if you miss even a single payment, then it can lead to adverse results.
Repayment history is also important because it shows the banks how good you are with money management and whether you are responsible or not.
Many people think that the more frequently they use their credit cards, the faster they can improve CIBIL score. This is not true and may, in fact, do more harm than good.
In every kind of credit score calculation, the credit utilization ratio, which is the ratio of your card limit to the amount of your average monthly spending, plays a big role.
If it’s higher than a certain limit, then it can lead to a poor score. So, you may want to use your card for a limited number of expenses only.
Did you know that if you pay only minimum payments against your card bills, then the balance gets transferred to the next month and is collected as debt?
Minimum payments should only be opted for when you are simply not able to pay the full bill. This is because although these save you from fines and other charges, they lead to debt accumulation which is harmful to your credit score.
When you start using a card, at one point or another you are likely to get another card option that offers more benefits.
While may feel inclined to replace your old card with the new one, that’s actually where you could go wrong.
Your oldest accounts have a huge impact on your score. This is because they contribute to your credit history, which is directly proportional to your score. So, you must never close the old accounts.
If you really want a new card, then you can get it but without closing the old one. At the same time, you might want to recalculate the credit utilization ratio.
Credit cards can be quite useful when you want to build a credit score. However, it’s important to be cautious still.
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