Credit is the ability to receive goods or services before actually paying for them. This is mostly a matter of risk for the person who is providing the service. A credit card is what you can use to make purchases or avail services via credit. This seems easy when you put it like that right? But getting credit is not everyone’s cup of tea. As mentioned earlier, it is a matter of risk for the one providing it. So they need to analyse your credit worthiness to establish if you are worth taking the risk. This creditworthiness is determined by a number. A number calculated according to how you have handled money in your financial history. It is called a credit score. Today we will see how credit cards affect your credit rating.
Every missed payment or every late fee adversely affects this score. So you need to be extra careful about your habits. Look at it like your marks in an exam. You get the best marks, you get the top colleges. You get medium marks, the choices become fewer and the facilities become less appealing. If you did not cross the cut off, you might not get admission at all that year. Similarly, if you do not have a good credit score, you will not be able to get the best services offered by credit providing companies.
As far as credit cards are concerned, there are both positive and negative things that you will read in the market. The kind of effect they have on your credit rating has more to do with your finance habits than the nature of credit cards themselves. Let’s see how having a credit card affects your credit score-
Do you have a Credit Card?
You might not even have a credit card, due to your personal beliefs. Nor do you know how credit cards affect your credit rating. If you belong in the same category, your credit score could be affected adversely. That is if you do not have a credit history otherwise. Open and active accounts on your credit report improves your credit score if you handle them correctly. Credit cards are the easiest ways to obtain credit and also a good way to establish and build a good credit history, especially if you are new to credit. Try managing your credit well as your credit score will reflect that. It would also be a great plus if you have experience with various credit accounts. If you have also taken a loan and maintained that well, it would also prove to be vital in improving your score.
How long have you kept your credit cards?
Your credit score is directly proportional to the duration you’ve had your credit card for. Needless to say that this is true only if you have a positive payment history with those credit cards. Credit cards affect your credit rating too in many ways. Keep your oldest credit cards and use them from time to time. Not only this helps your credit score in a good manner, but also make sure you make the most out of the latest credit card deals often. If you do have a good credit score you can easily qualify for a credit card with better terms and rewards than the one you’ve had. Make sure that your credit cards are open and active and maintain a good record to keep your credit scores high.
How credit limit of credit cards affect your credit rating?
Since credit cards affect your credit rating, you need to understand the concept of credit limit. Credit limit is the maximum amount of credit you can get. Although you are entitled to the entire amount, it looks bad on your credit report if you use up all of it. Maxing out your credit card or using all your available credit gives the lenders an impression of you being a risky borrower and your credit score will suffer because of it. Read more about why you should never max out your credit card . Not to forget that a lot of times, credit card providers also report a high balance. Meaning, the highest balance ever charged on your credit card. So, even if you pay your dues on time, your credit report can still show that high balance and affect your score. The ideal spending amount should be 30% of the credit limit.
How many credit card applications have you made?
Whenever you apply for a credit card, your credit report gets a record of your application added onto it. Not only does having the credit card affect your credit score but also the fact that you applied for it. Just applying might have a negative effect on your credit score if you make lots of applications in a small amount of time. Hence, it’s best to keep your credit card applications to a minimum and apply only when it is absolutely necessary and you are sure you can maintain it.
How many credit cards do you have?
The number of credit cards you have can also determine your credit score. As mentioned in the previous point, if you have applied to too many credit card in a short span, your credit score might get affected. But saying that having too many credit cards is bad for your score, would not be right. In some situations, having too many credit cards can be beneficial. It is a matter of why have you availed for those cards and how are you handling them. If you have a variety of credit cards and you have maintained them properly, it might enhance your score.
Do you carry out your monthly payments on time?
Not only do credit cards affect your credit rating, timelines have to do a lot when it comes to finances. You have to pay your dues, that is for sure but if you do not pay them on time, it might mean a bad thing for your credit score. You can boost your credit score by paying your bills before the due date while a late payment can take your credit score in a downward spiral. Even though, late payments aren’t generally reported to the credit bureaus until they’re 30 days late, you should ensure that the delay does not happen in the first case.
We hope this covers all the questions that you might have had regarding how credit cards affect your credit score. Make sure to choose the correct credit card for yourself. In case you still have any questions regarding this topic or personal loans, go through IndiaLends blog.
