Credit Card is a financial instrument issued by banks, which helps borrowers purchase goods both offline and online. Money spent on Credit Card is a form of debt. (Borrow now and pay later).
Credit Score is a three digit number that depicts the credit worthiness of an individual. Credit Score of an individual is checked by lenders. It is checked to determine financial capabilities of the individuals at the time of issuing credit/loan in any form.
Credit Cards are to be used wisely as they have direct impact on the Credit Score. Credit Cards are not for the individuals who are struggling with their finance, rather it’s for those who are financially well off.
Individuals who have not availed any form of loan/credit have no Credit Score. Individuals with a very short credit history too have no Credit Score. It takes about three months from the date you avail loans to update Credit Score.
Reserve Bank of India, RBI, has licensed four Credit Bureaus to generate Credit Score and Credit Report. All credit related transactions must be shared by all banks and financial institutions with licensed Credit Bureaus. Credit Information Bureau (India) Limited called TransUnion CIBIL, Experian, Equifax and Highmark are authorized by RBI to compute Credit Score and Credit Report. CIBIL is the most popular credit bureau in India. Credit Score has a range of 300-900 with 900 being the highest and 300 the lowest. CIBIL provides Credit Score of -1 to people who have no credit history.
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SEE ALSO: 4 Simple Ways To Boost Credit Score
Credit Bureaus arrive at a Credit Score by taking many factors into consideration. It is composed of repayment History - 35%, Amount Owed - 30%, Length of credit history - 15%, Credit mix - 10%. Below mentioned are the factors affecting Credit Score:
SEE ALSO: How To Correct Credit Report?
Just having a Credit Card and not using it has no effect on your Credit Score. The way you use your Credit Card post activation plays a big role in deciding Credit Score. Following are the factors related to Credit Cards that impact your Credit Score:
i) Credit Utilization: Credit utilization must be low. Maximum credit utilization shows that you are credit hungry and is considered to be a red flag by credit bureaus. It is advisable to use Credit Card only when there is a real need for it. It makes sense if you use it when you are getting discounts and cashbacks. Try to limit credit utilization ratio (CUR) at 30%.
ii) Credit Repayment: Making timely payment is extremely important as these impact Credit Score. Missing the payment dates brings down your Credit Score. Your credit card repayment is reflected on the Credit Report and influences your Credit Score.
iii) Credit Card Applications: Applying for multiple Credit Cards shows you to be credit hungry and in desperate need of financial support. Apply and use limited number of Credit Cards with timely repayments. On application for a Credit Card, the lender would check your Credit Score, this is called a hard enquiry. Hard enquiries negatively impact your Credit Score. The number of credit cards you have influences your Credit Score.
iv) Keeping Credit Cards For Long Durations: If you are using a Credit Card for a long duration with timely repayments, then you can expect to have a good Credit Score. If you want to improve your credit score, then don’t close your old credit card accounts (if you have any), continue to use them with timely repayments. This will boost your Credit Score as you will have a longer track record of repayments.
v) Minimum payments: This is the minimum amount that you need to make to avoid fines and penalties. Pay off all outstanding credit card dues within the billing cycle + grace period. Paying minimum amount due may be reported to the Credit Bureaus which has adverse effect on your Credit Score.
SEE ALSO: How to maintain a good CIBIL score?
It is critical to have a good Credit Score in order to stand a good chance to avail loans. Credit Score is rated as follows:
· Credit Scores in the range of 700-800 are considered ‘good’. It shows that debt is managed responsibly. Approval of loan takes lesser time and individuals are sanctioned unsecured loans like personal loans.
· Credit scores above 800 are considered ‘excellent’. Banks and financial institutions swiftly process loan applications. Individuals with Credit Score of 800 and above, get loans at low interest rates as they have wide range of lenders to choose from and lenders are open to negotiate loan terms.
We at IndianMoney.com, provide Credit Score and Credit Report for free. We have tied up with Experian. You must follow the below mentioned steps to check your Credit Score free:
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