Credit cards make our lives easier in many ways. They make purchasing expensive items like two-wheelers, air conditioners, etc. more affordable with EMI structure, offer discounts and cash back offers, and also become the ultimate savior in medical emergencies. However, did you know that you can use plastic money to get a lower interest rate too?
Credit cards and interest rates
The way you use your credit cards can affect the interest rates you get on personal loans and other types of loans. This is because they have a huge impact on your credit score which is one of the main factors that determine your interest rate. They also help to create a strong credit history that the lenders can go over to take a borrower into confidence.
By increasing your credit score with smart credit card usage, you can get a lower interest rate easily. The question is, how do you go about it? Let’s find out.
How to increase credit score with credit cards?
To increase your credit score with credit cards, take note of the following:
Limited Credit Utilization
Let’s consider a case in which you own a credit card that has a credit limit of Rs. 1 lakh. This means that you can spend as much as Rs. 1 lakh per month. However, if you want to improve your credit score, then you must avoid maxing out your card. Instead, you should strive to keep the credit utilization ratio below 30%. So, in this example, you should not spend more than Rs. 30,000 per month.
The thing is that high credit utilization is considered a sign of “credit hungry” behavior. So, a lender may assume that the reason you are using too much credit is that you are cash-strapped and/or facing financial difficulties. This can affect your rating negatively.
If a lower home loan or personal loan interest rate is important to you, then you can’t afford to miss credit card payments as late payments are extremely harmful to credit. In fact, many times it takes just 2-3 missed payments in a row to completely ruin your credit rating.
To ensure that you make your payments on time, you can install a budget or expense management app on your phone. If you are also repaying a loan, then you can ask your bank to activate “auto-debit” feature which will allow them to deduct the EMIs from your bank account automatically.
When credit card users are unable to pay their bills, they turn to “minimum payments”. Although these sound good on paper, they are actually bad for your credit rating and only serve to delay the inevitable. Let’s understand why.
When you receive a credit card bill, then you are supposed to pay the full amount. However, if you are not in a state to do that, then you can make the minimum payment which is usually around 2% to 5% of the total amount. This ensures that the card issuer doesn’t levy a fine and/or take a legal action against you. However, what happens in this is that they carry over the remaining balance to the next month. So, when you receive the next bill, it includes the balance from the previous month. This is never good for your credit rating and only increases your debt. Thus, it’s strongly advised that you use credit cards responsibly and avoid luxuries if you can’t afford them at a given time. There is no other way of improving your credit score to avail lower personal loan interest rate and easy loan approvals.
Using credit cards in a responsible manner helps to improve credit score, there is no question about it. However, you can much better results if you use the cards along with a loan or some other type of credit such as a mortgage. This is because the majority of credit rating agencies give more points to accounts that have multi-layered credit history rather than a single-layered history.
Today, credit cards are used by millions in India for shopping and making payments. However, their true value lies in increasing creditworthiness which benefits you in the long term. So, make sure you put the information above to good use.
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