Credit Cards can help you build a strong credit history and improve your credit score, a crucial factor in maintaining your financial health. Credit Cards can be effective credit-building tools, paving the way for greater financial flexibility and access to various lending opportunities if used wisely.
Why is a good credit score important?
Your credit score is a three-digit number that reflects your creditworthiness. It's the most important factor considered by lenders while sanctioning loans, setting interest rates, and even offering insurance.
If you have a good credit rating, you are considered a lower-risk borrower and can be eligible for better rates, fees, etc.
But before you dive into the specifics, it is important you know the key factors that contribute to your credit score:
- Payment history (35%): Making timely payments for your Credit Card (and other bills) influences your score.
- Credit utilisation ratio (30%): This refers to the amount of credit you use compared to your total limit. Ideally, you want to keep this below 30%, with even lower being better.
- Credit age and mix (15% and 10%, respectively): The longer your credit history and the more diverse your credit accounts (Credit Cards, Loans, etc.), the better your score.
- Credit inquiries (10%): Every time you apply for a new type of credit, a hard inquiry is registered on your report. Frequent inquiries in a short period can negatively impact your score.
How do Credit Cards help in building credit?
1) Pay your bills regularly
Late payments can significantly damage your credit score and even attract penalty fees. The best way is to set up autopay for the minimum payment amount to ensure on-time payments without any manual intervention. You can then pay the remaining balance as you wish.
The Credit Card company can report your account to credit bureaus in case of late payments after 30 days past the due date. It is said that the negative mark due to late payments can stay on your report for up to seven years.
2) Maintain a low credit utilisation ratio
This ratio, which relates your Credit Card balance to your credit limit, plays an important factor in your credit score. Credit scoring models report these values to determine the accurate ratio.
Low utilisation is better for your score, especially with a low credit limit. Even if you make a large purchase, you can maintain the ratio by paying down your balance before the end of your statement period, about 21–25 days before the due date. Also, cards like the Axis Bank Neo Credit Card can help you convert purchases above ₹2,500 into EMIs through multiple options. Nevertheless, a good rule of thumb is to maintain your outstanding balance at 30% or less of your credit limit. You can slowly work on lowering it to 10%, which is ideal for increasing your score.
3) Other factors
Apart from the above two main points that impact the most, there are a few things that can help you boost your credit score with an Axis Bank Credit Card:
- Maxing out your credit limit, even if you can afford to make the full balance payment, can negatively impact your score.
- It's recommended not to close off your first card, be it your Student Credit Card, as it shows a long history. A long credit age because of responsible use is considered good for your score.
- As they always say, diversification goes a long way. You can check out different types of cards, like a secured card or a Student Credit Card. They can help you build credit with responsible use against a set deposit amount. Once you set a foundation, you may explore different card options aligned with your spending habits.
- Credit inquiries are identified as hard and soft inquiries. A soft inquiry could be when you check your own score or when Credit Card companies want to send you pre-approved offers. Hard inquiries include applications for new credit, and when done frequently in a short period, they could adversely affect your score.
- Always use your Credit Card responsibly and spend what you can afford to repay.
Also Read:How to get a Credit Card without bank account? - 5 Easy steps
Conclusion
Building a good credit score is not an easy feat, but strategic use of Credit Cards can get you on the right path. A good score can help you get several benefits, so it's best that you take control of your finances.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
