6 ways to smartly use your credit card and maintain a healthy credit report

Posted by arjunreddy on November 26th, 2018

A credit card is one of those immensely popular financial tools that help individuals to manage their finances smoothly and efficiently. The multiple benefits that it offers have made it one of the most sought-after financial products today.

You may also be well aware of the concept of credit report prepared by credit bureaus like TransUnion CIBIL in India. It’s a detailed report about your credit activity. It analyses your entire credit history including your credit card usage pattern, your past loans of every kind, and most importantly your repayment behaviour. The entire credit report is summed up in the form of a 3-digit number called a ‘credit score’ which is considered good if it’s above 700.

The reason why your credit report and therefore the credit score is of primary importance is that since they tell a lot about your creditworthiness, lenders largely depend on the report to decide whether you can be trusted with a loan or not. That’s why having a good credit report is the most crucial factor for you to avail a loan in the future.

One way to achieve a good credit report is the smart use of your credit card. Using it ideally would certainly give a boost to your credit report. The opposite is also true – irresponsibly using your credit card will cause the credit report to take a hit. Here are a few ways how your credit card can help your credit report.

Monitor your credit card utilization ratio: The credit utilization ratio is the ratio of your credit card outstanding balance to the total credit amount available on your card. It has the second biggest impact on your credit score after your credit repayment history.

• Calculating your credit utilization ratio: To calculate your credit utilization ratio yourself, divide the total outstanding balance on your credit card by its total credit limit and then multiply the figure by 100.

• Ideal number: Finance experts believe that a desirable credit card utilization ratio is anywhere below 30.

• Reason: A low credit utilization ratio convinces your potential lenders that you are not entirely dependent on the loan amount and that you are sincere about the repayment of your loans. So, an overall low ratio would usually work in favour of your credit report.

• Tips: Broadly speaking, there are two ways to keep the ratio low – keeping your outstanding balances low and increasing your credit limit.

Firstly, even if you can’t pay the entire outstanding at once, try to pay as close to it as possible. And do not wait until the due date to make the payment, pay in advance.

Secondly, if maintaining a ratio of 30 does not seem easy with your current credit limit, request your card issuer to raise the limit so that the ratio drops below 30.

Maintaining a low number of credit accounts: If you have the habit of signing up for new credit cards primarily because of the initial sign-up benefits and the tempting reward points program and later keep them unused or close the credit accounts, you shouldn’t be surprised to know that this practice harms your credit score.

• Ideal number: Although there isn’t a fixed number, having two or three credit cards can indeed work in your favour as they act as your backup tools in case you lose your most frequently used card or are unable to use it for any reason. But anything more than that isn’t encouraged.

• Reason: Having too many credit cards can be a messy affair because it increases the hassles of multiple repayments and other such inconveniences. Thus, if all the cards aren’t used ideally, your credit score may fall rapidly.

• Tips: One of the best ways is to carry out a proper analysis of all your financial needs and utilization patterns before applying for a credit card. Since different cards are designed to meet the financial needs of different sections of people, a clear idea about your expenses would help you choose the right card.

Payment history: This is the most important factor and has the biggest impact on your credit report. Experts say that your payment history determines around 35% of your credit score and that’s why you should take extreme care to maintain a healthy credit payment history.

• Reason: You payment history tells a lot about your creditworthiness. It highlights your loan repayment behaviour and ability and says whether you are capable and usually willing to repay the debts to your lenders. This is the reason why apart from your credit card payment history, your lenders would also thoroughly check the payment history of your other types of credit accounts like mortgage loans, retail accounts, instalment loans, and other accounts with finance companies.  

• Tips: The most effective way to build a strong credit history is the timely repayment of all your dues. If you have multiple credit accounts, prepare a robust repayment plan for all of them. Although an occasional late payment doesn’t harm your credit report, if you do it persistently, your credit report is adversely impacted. Also, even if some of the loan issuers may settle the accounts with you for a payment that is lower than the actual amount due, you should never let it happen. You loan issuers are quick to inform the credit bureaus about your repayment habit and you will likely be paying heavily for this in the future.

Age of your credit account: It’s a commonly known fact the older your credit card and the longer you have been using it, the higher are the chances for a good credit score. A relatively old credit card account with a solid repayment record is the best combination for a pleasant credit report.

• Reason: Lenders prefer a long credit history because they get to view a clear picture of your credit scenario. It’s quite easy for them to draw conclusions and form opinions about your creditworthiness by studying a credit account that has been in use for a long time.

• Tips: As long as possible, don’t close your credit card accounts, particularly the old ones. Instead, try to use them frequently and repay the debts regularly.   

Avoid applying for new credit cards: That’s because the new card would cause the average age of your credit history to drop.check eligibility for credit cards here

• Reason: Whenever you apply for a new credit card, the issuer initiates an enquiry on your credit report and this enquiry may cause your credit score to drop by a few points. Also, there’s the potential risk of getting an overall high outstanding balance on the new card.

• Tips: Focus on using your existing credit cards instead of getting a new one if you don’t really need it. Reasons like welcome gifts and introductory offers aren’t good enough.

Opt for a mix of different types of credit cards: Opting for a mix of different types of credit cards like bank credit cards, gas station credit cards, and retail credit cards can also help your credit report.

• Reason: A good repayment history of these different credit card accounts will create a good impression on the lenders. Also, you get the flexibility of using specific cards for specific purposes as per the existing offers on particular categories.

• Tips: It’s not mandatory for you to own different types of cards but even if you decide to do so, you must ensure the timely payment of the outstanding amount on all the cards.

If you consider these six points when dealing with your credit card and use it judiciously, you can definitely build a good credit report for yourself. Lastly, bear in mind that a credit card is something that you can use to manage your finances adroitly. However, if managed carelessly, it can be the biggest source of financial concerns for you.