It is a well-established fact that maintaining a healthy credit score is essential for credit card users, loan seekers and people who want to get a line of credit. In addition to income, CIBIL Score and Credit Information Report (CIR) are used by banks/NBFCs to evaluate applications for Loan or Credit Card. Until a decade ago, credit cards were not very popular among Indians. However, increased exposure to cashless transactions and other banking instruments has led to a rapid increase in the number of credit card users.
Latest findings suggest that Indians have become aggressive when it comes to credit card usage. The important thing for credit card users to consider is that their usage will be instrumental in determining their CIBIL/credit score. Misuse of credit cards involves a significant amount of risk and could spoil the account holder's credit score. It is very important to maintain a high credit score to avail loan benefits.
While credit cards seem like a landmine and its correct usage is slightly tricky, here are five simple ways in which you can maintain a healthy credit score while using your credit card:
1) Do not default on monthly payments: A credit card is like an unsecured loan, which gets paid back to the bank every month. It is strongly recommended not to skip repayment cycles. If you fail to pay the credit card bill before the due date, you have to pay higher interest and an additional late fee. In addition to the monetary penalty, your credit score also gets affected if you default on monthly payments. This issue usually can be resolved by ensuring that you maintain a balance of income in proportion to your spending and make timely payment on the outstanding amounts.
2) Do not pay less than the minimum due amount: All credit card users should ensure that they pay either the full outstanding bill amount or above the minimum due. If you are unable to do so, your credit score will get affected.
In order to avoid this problem, you should always check your bill thoroughly and make either full payment or any amount above the minimum due before the due date.
3) Do not overuse your credit card: Every bank has a spending limit for every credit card holder. This limit is set based on your repayment capability, which varies from bank to bank. You should make sure that your utilisation stays below 30 per cent, which helps maintain a healthy credit score. The credit bureau tends to give a higher credit score to users, who cap their usage at 30 per cent of the spending limit of their credit cards. Although this is a recommended practice by most experts, it is not a mandate. Being unable to follow this has a minor impact on your credit score.
4) Do not withdraw cash using a credit card: There has always been a place where credit card holders find themselves in the dearth of cash and tend to consider withdrawing money using their credit cards. This is probably the most critical point out of this list of things that one must do to maintain a healthy credit score while using a credit card. You must be aware that using credit cards for cash withdrawals is an extremely expensive affair. The interest rate for withdrawing cash using a credit card is significantly higher than making purchases directly online or at a PoS machine. Also, withdrawing cash using credit cards is not considered to be a positive action by banks and credit bureaus; therefore, you should refrain from doing so to maintain a good credit score.
5) Avoid multiple credit cards and one-time debt settlements: Maintaining multiple credit cards is not advisable if your credit score is low. In order to maintain a healthy credit score, you should refrain from having more than one credit card. If you are spending through all your credit cards, the pressure of debt will keep building and end up harming your credit score significantly.
It is often advised to have two credit cards to maintain a balance, but if you have a low credit score or you are struggling to repay the bill, then it becomes very tricky to maintain the cycle. If the balance is not maintained, the debt accumulation will affect your credit score adversely.
Another activity that affects the credit score is a one-time settlement of debts. A one-time settlement should be opted for only if you are broke and are desperate to reduce your debt. A one-time settlement might be agreed upon by your lenders to reduce your debt mound, but it negatively impacts your credit score. This indicates your incapability to maintain a steady repayment cycle, which lowers your credit score.
(The author is founder and CEO, IndiaLends)