Consumers typically view credit cards as a way to purchase what they want without having to worry about budgets and cash in hand.
While credit cards are highly convenient, they need to be used with extra caution. Irresponsible use of credit cards can cause you to fall into a debt trap, damaging your credit score and history. A poor credit score further deprives you of securing loans and other credit cards in the future.
On the other hand, smart usage of credit cards is an excellent way to build your credit score. Responsible usage and on-time credit payments demonstrate to lenders that you’re good at handling credit. This works well for your credit score.
Whether you’re building your credit score from scratch or working on improving it, a credit card is a powerful tool to help you increase your credit scores. Luckily learning how to manage your credit cards well isn’t rocket science. With a few innovative strategies and tips up your sleeve, you can make the best use of your credit cards to build and maintain a healthy credit score.
This guide lists the basic steps of using your credit cards to build your credit profile and secure a bright financial future.
How do credit cards help you build your credit profile?
Before we look at the right strategies to use your credit card, you need to understand how credit cards impact your credit score. This will help you use your cards the right way to avoid any damages to your credit score and history.
All the transactions you make using your credit cards are reported by the credit card company/bank to the authorised credit bureaus like – Equifax, Experian, TransUnion CIBIL™ and CRIF HighMark. The bureaus use this information and other credit information like your loans, etc., to build your credit report. Based on the information present in the report, credit bureaus generate your credit score.
Not sure of your current credit score? Worry not! You can check your credit score for free within a few minutes using CreditMantri. Just enter a few basic details – your mobile number, email ID and pan – your credit score will be generated within a few seconds.
Best Ways to Build your Credit Score using your Credit Card
Your credit card can either help you build a good credit score or damage it – it all depends on how you use it. To build an excellent credit score (750+), you need to ensure that you make on-time payments and avoid maxing out the credit limits on your card.
Here are some of the best strategies to use your credit card to improve your credit score:
#1: Pay your Credit Card Bill on Time
The most significant factor that influences your credit score is your payment history. So, it’s highly recommended that you pay your credit card bill on time every month.
Missing out even a single payment can impact your credit scores. If the bill is 30-days past due, it’s reported as a late payment to the credit bureaus. A late fee is a negative mark on your credit report and impacts your credit score negatively. Note that a late payment can stay on your credit report for 7 years.
Additionally, delayed credit card bill payments also incur additional penalties like high-interest charges, late fees, etc.
To build your credit and avoid paying penalties, make sure to pay your credit card bill on time. If it’s not possible to settle the bill in full, ensure that you pay at least the minimum amount every month.
Tips for Smart Credit Card Usage:
The easiest way to ensure that you don’t miss a credit card bill is to set up autopay. Set up auto-debit facilities to pay your credit card bill on a specific date every month. Set up this date 3 – 5 days before the due date, so there is sufficient time for the payment to reflect in the credit card issuer’s records.
#2: Maintain a Low Credit Utilisation Rate
The credit utilisation ratio is another crucial factor that determines your credit score. This ratio is derived by dividing the credit card balance by the overall credit limit. Let’s say you have a credit card with a maximum limit of Rs. 75,000. The balance on the card is Rs. 20,000. Then, the credit utilisation ratio is (20,000 / 75,000 *100) = 26.6%.
The lower the ratio, the better it is for your credit score.
Tips for Smart Credit Card Usage:
- Do not use your credit card for all your purchases. Instead, use it only for a specific type of purchases like fuel, groceries, etc., to limit the balance on it.
- If you use your credit card often or for larger purchases, you can lower the utilisation ratio by paying your credit card bill several times a month. This reduces the outstanding balance, which in turn drops the utilisation ratio.
What’s the perfect credit utilisation ratio to build a high credit score?
There’s no specific ratio. However, keeping it in the range of 10% to 30% is helpful to build your credit scores.
#3: Handle your Credit Card like a Debit Card
Very often, we treat credit cards like an unlimited source of cash. We fail to monitor and track our credit card spends diligently. When it’s time to make the payment, we realise how much we have spent on it. If you’re not cautious with credit card usage, then you can easily overspend on it and regret it later.
Tips for Smart Credit Card Usage:
It’s highly recommended that you maintain a budget and stay within it – irrespective of whether you use a debit or credit card. This way, you can control your spending and avoid huge credit card bills beyond your repayment capacity. The more attention you pay to credit card spends, the easier it is to avoid huge bills and repay bills on time without incurring additional interests and other penalties.
How to build my credit score without a credit card?
Using your credit card smartly is easy to build your credit history and score. It’s not the only option. Other credit choices like loans are also reported to credit bureaus. Here are a few alternative ways to build your credit score without a credit card:
- Look for small credit builder loans. These are small-ticket loans for a small tenure. By repaying these loans on time, you establish a good repayment history, which positively affects your credit score.
- You can also go for a secured credit card. These cards are a stepping stone for individuals who are new to credit. These cards are sanctioned to all eligible individuals, irrespective of their credit score. To open these cards, you have to maintain a fixed deposit with the card issuer. The credit limit is around 80% to 90% of the card issuer. By repaying the bills on time, you can build your credit score quickly.
- If you’re a student, you can opt for special student credit cards. These cards have relaxed eligibility limits and offer special discounts on education-related Using a student card helps you build a credit history and score, even before you’re employed.
- You can also ask a family member to add you as an authorised user on their credit card. This helps you build a good credit history, as long as the primary user manages their card well.
A credit card is a powerful tool that can help you build your credit score. Using the card smartly, you can enhance your credit history and score, unlocking the doors to future loans and credit cards.
Make sure that you monitor your credit card account regularly to spot any suspicious activity. If you notice anything amiss, report it to your credit card company immediately to get it resolved.
Be credit smart and start enjoying the best credit offers!