If you start with your first job and get first-hand experience in managing finance, you will know how important a credit score is. Whether you want a home loan to get the house of your dreams or take out a car loan to get your hands on the trendiest 4-wheeler- the passage to all loans goes through your credit score.
A credit score is not something you can build or correct overnight. The process of building credit is long-drawn and requires stringent management of your personal finances, expenditure, and savings. Building credit can initially come across as a daunting task, but it mandates a series of tiny acts to help shape your credit profile.
And one of the best ways to build your credit profile involves a credit card. Yes! A credit card is a mind-blowing tool that gives you dual benefits- it allows you to make credit payments and helps you build a credit profile, given you adhere to all best practices of using a credit card.
In this blog, we dive deep into what it takes to build a good credit score with a credit card from scratch and what you should do to build credit if you are just starting using a credit card.
Top 8 strategies to build credit with credit cards
If you want to build credit with a credit card from scratch, you must employ a few strategies each time you take the plastic money out of your purse.
Here is an 8-point guide on the fastest way to build a credit score with a credit card:
1. Ensure timely payment of credit card bills
The number one point you must ensure each month is to pay your credit card bill every month before the due date. Credit card companies generally give a fortnight from issuing the bill until the due date. Use this period to ensure you repay the money to ensure you have a stellar credit score.
Doing so demonstrates your financial discipline and responsibility; it also underlines your creditworthiness to the creditor. If you cannot repay the funds in full to the card-issuing company in full before the due date, at least make the minimum payment before you can pay your dues.
2. Keep credit utilization ratio in check
The credit utilization ratio is one of the most important factors governing your overall credit score. The credit utilization ratio refers to a certain percentage of the total credit limit you have used. Ideally, your credit utilization ratio must not cross the 30% mark, or it may translate into your credit score taking a dip.
For example, if your credit card provider has set your card’s credit limit at Rs 1,00,00; then, as per the norms of the credit utilization ratio, you can spend up to Rs 30,000. Any expenditure in addition to Rs 30,000 may lead to a negative impact on your credit score.
Thus, it is recommended that you keep your credit utilization ratio low and check for building a good credit score with a credit card.
3. Avoid having too many cards
It can be very tempting to get many credit cards that come with exciting offers. With too many rewards points being offered by credit card companies, it is very easy to fall prey and get many cards. With so many cards, it can also become tempting to overspend and land in a situation where you don’t have enough savings to repay the bill.
Ultimately, it may become difficult to manage so many credit cards in addition to debit cards. This may lead to you missing repayment deadlines, an act that can severely damage your credit score. Try to keep the number of credit cards you own in check so you can actively track your expenses and repayment timelines.
4. Keep old credit cards active
Many people sign up for a credit card if they find that it offers attractive discounts or rewards. They use it a few times and never bring it to use later. This habit can put a severe dent in your credit score. Inactive credit cards are the enemy of a healthy credit score!
Try to keep your credit cards active. It shows responsible and diligent use of credit cards that can help you in building a good credit score with a credit card. Suddenly getting rid of a credit card can also lead to a dip in your credit score.
5. Apply for a secured credit card
A secured credit refers to a card backed by a sum of a cash deposit you make with the card-issuing company. This cash deposit will act as collateral if you cannot repay your dues to the credit card company. This deposit is generally the same as the credit limit being offered to you.
Secured credit cards are great for people just starting their credit journey. Card providers prefer these cards since it limits the credit card company’s risk.
6. Keep your spending within your credit limit
Of course, you will try not to spend more than what your credit utilization ratio permits you to spend. However, there might be instances where you must make a big purchase and put it on your credit card to repay it the next month when you receive your salary.
Even in such cases, make it a point not to cross your credit limit as the fastest way to build a credit score. This will ensure that your credit score remains strong, and it will also promote healthy spending habits in your life.
If you need access to more credit, ask the credit card company to see if they can increase your credit limit. Now here is the fun part- if your credit score is the gold standard, the card company may increase your credit limit, increasing your credit utilization ratio!
7. Avoid applying for too many cards at one time
Try not to apply for too many credit cards in one go. When you make multiple credit card inquiries and applications, it is recorded by the lenders and reported to the credit rating bureaus; and is looked down upon. Lenders see multiple credit card inquiries within a short time as a sign of desperation and financial instability. Doing so can lead to credit rating agencies reducing your credit score by a few points.
8. Maintain a healthy credit mix
Credit mix refers to a combination of different credit lines and credit accounts. Some common credit lines include loans, credit cards, and mortgages.
Ideally, it is recommended that you have a healthy credit mix with various credit lines as the fastest way to build a credit score. this shows your financial discipline and responsibility to the lender. A good credit mix can positively impact your credit score and make you seem highly creditworthy to lenders.
Bonus tip: Set up auto-pay
Autopay is an additional feature offered by new-age credit cards where you can link your credit card account with your savings bank account to pay the bills each month before the due date automatically. All you must do is ensure that there is enough money in your savings bank account to be deducted on a certain date of the month, and the rest of the heavy lifting will be taken care of by technology!
If you are someone who forgets to pay their credit card bills on time, setting up auto-pay might be just the solution for you!
You can build credit from scratch using a credit card in small steps. All you have to do is follow the guide above to keep your credit health in the pink. Doing so will help you build a good credit score with a credit card; it will also keep your finances and spending habits in check.
In addition to helping, you build credit, these simple tips will also aid in using your credit card wisely.
Get a credit card that matches your needs and helps you gradually build a credit score at IndiaLends today! Sign up to know more about our rewards points program!