Smart ways to use your credit card for a high credit score

From providing financial assistance during unforeseen exigencies to extending rewards in the form of cash backs and discounts, credit cards have been making our lives increasingly convenient in numerous ways. In addition to this, it also help in building and maintaining strong credit score.

With banks and financial institutions increasingly setting risk-based pricing for loans, it is vital for card users to adopt money habits that would help in building a strong credit score:

Make timely and full payment of your credit card bills

Using credit card for making purchase is equivalent to taking a loan, given that card issuerspay on your behalf and you repay the amount later on as per your billing cycle. Being a form of credit, credit card transactions are reported to credit bureaus who evaluate/ update your credit score on the basis of your repayment behaviour.

Lenders generally prefer lending to consumers who follow disciplined approach towardscredit card usage by paying bills on time and in full.Hence, make sure you clear your dues on time.  Not doing so can also diminish your chance of availing loans in future.

Limit your credit utilisation ratio to 30-40 per cent

Credit utilisation ratio refers to the proportion of total credit card limit utilized by you. For instance, if your total credit limit is Rs 75,000 and your credit card transactions amount to Rs 25,000, then your ratio would come out to be 33 per cent. 

As lenders generally consider a credit utilization ratio of over 30-40 per cent as a sign of credit hungriness, credit bureau may pull down your credit score on breaching thismark. Therefore, to avoid damaging your credit score, make sure you contain your credit utilization ratio within 30-40 per cent range.

If you tend to frequently breach this level, request your credit card issuer to increase your credit limit, or else, get an additional credit card. Doing so would enhance your overall credit limit, and thereby reduce your credit utilization ratio.

Retain old credit cards

Average length of your credit history is one of the key determinants considered by credit bureau while computing your credit score. As lenders generally prefer lending to borrowers with a longer average age of credit accounts, it’s important for credit card users to retain their older credit cards. The older your active credit cards are, the higher would be the average age of your credit history. 

Moreover, the total available credit limit on your credit cards also reduces when you close any of your credit cards, which may push up your credit utilization ratio, which is again capable of pulling down your credit score. It’s therefore prudent to retain your older credit cards. In case you own multiple credit cards and need to close some of them, consider closing relatively newer ones instead of the older cards.

Check your credit score periodically

Whenever you apply for any form of credit, be it loan or credit card, lenders fetch your credit report from credit bureau to evaluate your creditworthiness. Your credit report summarizes your credit history, including your past as well as existing loan and credit card accounts, basis which credit bureaus calculate your credit score.

As the credit information listed in your credit report is provided by lenders and credit card issuers, any error on the part of your lender or credit bureau can adversely impact your credit score as well as future loan and credit card eligibility. This makes it important to periodically fetch your credit report in order to prevent such errors or possible frauds from getting bypassed.

Upon spotting any error or unfamiliar transaction, inform your credit bureau and lender as soon as possible, and make sure it gets rectified to prevent further damage to your credit score.

Remember that you are entitled to one free credit report from each of the credit bureaus every year, so consider spreading your credit report requests in such a manner that you can avail one free credit report every quarter from bureau. Alternatively, you can also consider fetching them from online financial marketplaces that provide free credit reports along with monthly updates.

Avoid submitting direct enquiries to lenders

Whenever you directly submit a loan or credit card to any lender, they pull out your credit report from the bureau, for evaluating your eligibility. Such lender initiated credit report requests are treated as hard enquiry by the bureau, and each one gets listed in your credit report and may even pull down your credit score by few points. 

Hence, instead of submitting multiple loan or credit card enquiries directly to lenders, especially within a short span of time, consider visiting online financial marketplace. Credit report enquiries initiated by such portals are treated as soft enquiries, which do not affect your credit score. Moreover, these platforms assist you to compare and choose the most suitable lender as per your financial requirements and eligibility. 

By Radhika Binani, Chief Product Officer, Paisabazaar.com