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Here’s How Your Credit Card Use Shapes Your Credit History

On your credit card account, you have a spending limit. If you’ve been hitting the spending limit frequently, it can have a high impact on your credit score

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Credit scores are getting increasingly important in evaluating your creditworthiness and whether you deserve to get a loan at the most attractive interest rates. Your credit score is a numerical expression of your creditworthiness typically ranging between 300 and 900, 900 being the best score. Broadly, your score is shaped by how disciplined and punctual you’ve been with your loan and credit card payments. But there are several aspects of your debt management that influence your score. Let’s take a look at how your credit card use impacts your credit score. 

Credit Utilization Has High Impact

On your credit card account, you have a spending limit. If you’ve been hitting the spending limit frequently, it can have a high impact on your credit score. A high Credit Utilisation Ratio (CUR) is seen as hungriness for short-term unsecured credit on your part. This isn’t a desirable trait in a potential borrower, even if he can repay his dues in time and in full. Ideally, limit yourself to 20-30% of your spending limit, and always repay the dues in full on time for the best impact on your score. You can also split credit card spending between multiple cards to avoid a high CUR on a single card. For example, you have two cards each with a spending limit of Rs. 50,000. Instead of spending Rs. 20,000 a month on one card, spend Rs. 10,000 each on both. 

Repayments Have High Impact

The best way to have a strong credit score is to always repay your dues on time. Even a single late credit card payment can send your score tumbling by hundreds of points. The best way to ensure your card bills are repaid on time is to assign an ECS mandate with your bank to automatically settle your card dues every month. Don’t make cheque payments on the due date since the amount will take at least 2-3 days to be credited to your account and this will be still considered a late payment. Basically, one late credit card payment can damage your score and upset your chances if you happened to be in the market for a loan at the same time. 

An Old Card Is The Best Card

If you have a credit card that you’ve held for several years, it indicates that you’ve been able to repay your dues and not fall behind on your card payments. This reflects positively you on. Long credit lines – meaning, loan accounts or credit card accounts you had opened several years ago – have a medium-sized but positive impact on your credit score. The longer you hold a credit card, the better for you. This is an incentive for you to not go buying and discarding cards every now and then. 

Don’t Make Too Many Applications

Every time you apply for a new credit card or loan account, the lender or bank initiates an enquiry into your credit history. This is what we can a “hard” enquiry. Too many hard enquiries in a year can have a medium, negative impact on your credit score. Therefore, do not make too many credit card applications. Instead, shortlist the ones you’re eligible for, compare their features, and go for one that’s best suited to you. Hard queries differ from soft queries – ones that you yourself initiate as a way to get your own credit report.  

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Adhil Shetty

The author is CEO & Co-founder,

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