Credit score is a 3-digit number that represents your creditworthiness basis how you have been managing your loans and credit cards. It is the first thing that lenders check when you apply for a new credit product and directly impacts your chances of approval for the same. Factors like payment history, credit utilization ratio, length of credit history, etc. together make up your credit score.
Credit cards have a major impact on your credit score and can improve or damage your score depending on how you use them. Below we talk about the top factors that influence your credit score and the role that credit cards play in each.
Payment History
When calculating your credit score, credit bureaus give maximum weightage to your repayment history, which includes your loan EMIs, credit card dues, etc. Regular timely payment has positive impact on your credit score whereas missing or delaying your payment beyond the due date can lead to a drop in your score.
When you miss a credit card payment, the same reflects in the ‘Days Past Due’ section of your credit report. For example, if you miss your August payment by 10 days, the DPD section will show 10 in the month of August, usually marked in red. Breaching your due date by several days every month or missing payment altogether may lead to a drastic drop in your credit score. Hence, it is advised to clear your credit card dues on or before the due date.
Credit Utilization Ratio
Credit utilization ratio (CUR) is another important factor that impacts your credit score. It shows the percentage of your total available credit limit that you are currently using. For example, if your total credit limit is Rs. 1 Lakh and you have used Rs. 40,000, your CUR becomes 40%. A low CUR is considered good for your score as it shows that you can manage credit responsibly and are not over-reliant on credit.
Credit cards, when used strategically, can be quite helpful in maintaining a low CUR. If you own multiple credit cards, it is better to spread your expenses across multiple cards than maxing out one card. However, consumers who own a single card may find it difficult to keep the usage low. In such cases, it is advised to request a limit increase on your existing card or apply for another credit card (as the limit on the new card will bring your overall CUR down).
Length of Credit History
The length of your credit history shows how long you have had your credit accounts open. This is also considered for calculating the average age of your credit. A longer credit history shows you have more experience in handling different credit products and has a positive impact on your score, provided you handled credit responsibly.
For most consumers, credit cards are the first credit product that introduces them to the lending space. Since the first credit card you get is often a basic one, you might think of closing the account, once you own better credit cards. However, keeping older credit cards active ensures that the age of your oldest account continues to benefit your credit history.
New Hard Enquiries
Whenever you apply for a new credit product like a loan or a credit card, the lender pulls your credit information from one or more credit bureaus, which is commonly known as hard enquiry. Every time a hard enquiry is initiated on your profile, your credit score suffers a temporary drop. While the impact of a single hard enquiry can be recovered with responsible credit usage, several hard enquiries within a short span can cause significant drop in your score. Hence, you must keep a gap of 4-6 months between new applications.
Nowadays, credit cards come with excellent benefits across shopping, travel, dining, entertainment and more. Several co-branded cards are also being offered in collaboration with leading brands. Card issuers are extend pre-approved card offers to the consumers, making application easy and hassle-free. While these enticing offers can make it tempting to apply for multiple cards, it’s crucial to avoid submitting several applications simultaneously to protect your credit score.
Credit Cards and Credit Score: Myths vs. Facts
There are several myths around how credit cards impact your credit score. Below we bust some of the most common misconceptions:
| Myths | Facts |
| Credit cards cause debt spiral and lead to a low score | Those who manage to pay back the entire outstanding amount each month are safe from debt while those who miss their bill payment often or default on their cards can suffer a significant drop in their credit score |
| You should have only one credit card | There is no rule as to the number of credit cards one should have. You should be able to manage the bills on each of the cards you have. Unless you miss a payment, your credit score will not be affected. |
| Credit limit increase is a scam | If the lenders find you to be a responsible borrower, they can offer you a higher credit limit. A higher limit will reduce your credit utilization ratio, which may improve your credit score. |
Credit cards can help or hurt your credit score, depending on how you use them. Always clear your dues on time, maintain a low credit utilization ratio and make responsible usage to see an improvement in your score. If you have balances going out of hand, it is better to convert the dues into EMIs instead of paying only the minimum amount due, as it will lead to finance charges and late payment charges, which could start a debt spiral and damage your credit score.
5 Comments
Hello, this is so wonderful and informative share. I am so glad to reach out to such a helpful blog. I really appreciate your quality work and hope to hear more informative and interesting topics from you. Keep sharing like this. Thanks again.
Comment * Thank you for explaining the credit card management …..I was skeptical about the use of credit cards in banking system…but your article clears my doubts…..
Thanks, Madhavi! We are glad that the article helped you clear your doubts.
We understand that a lot of first-time users are skeptical about credit cards but with smart usage and timely bill payment, you can make the most of it and, at the same time, improve your credit score.
Very very useful