A tiny rectangle colorful plastic card fitted with a microchip and loaded with power to purchase. Yes, we are talking about Credit card. Our young, fast and furious generation is always excited and ready to use such incredibly powerful financial products.
Acquiring a credit card is not a challenging task now a days. Credit card market is very competitive today with the presence of 30+ banks and NBFCs. All the traditional and new age banks are offering unique benefits and features associated with card to attract maximum users.
“1) Quicker approval for loans and credit card, 2) higher credit limits with credit card, 3) cheaper interest rate on loans, 4) better deals on credit card, 5) discount on processing fee and other charges are benefits of having a high CIBIL score.”
Credit card is a wonderful financial product if used responsibly and in planned manner. Same credit card can be most vulnerable and dangerous financial product for your financial health and financial score as well if used irresponsibly without any planning.
In most of the cases first-time credit card holder don’t know that how to use a credit card in planned and responsible manner. If a credit card used responsibly, it saves interest and help the user to build good credit history faster. Good credit history leads to good credit score. Good credit score helps in availing unsecured loans, mortgage loans faster to live your dreams.
Most of the banks hesitate to provide Personal Loan, Car Loan and Home loan without any credit history. No Credit history is also termed as “-1 CIBIL Score” in banking terms. Some banks or NBFCs do offer Personal Loan, Car Loan and Home loan with no credit history on higher interest rate and more stringent terms and conditions. These Banks or NBFCs may charge 2% – 5% higher interest rate as compare to normal prevailing interest rates. These NBFCs may ask for a guarantee from Govt. employee with his SPDC (Security Post Dated Cheques).
If you are a fresher and have taken up your first job. You must be willing to start living your dreams i.e., taking a new car, or buy your own house. Finance plays a significant role to achieve such goals. In general banks don’t provide personal loan, car loan and home loan to new job starter without good credit history.
However, some banks offer entry level and low limit credit cards to salary account holder based on their salary account relationship. Credit card is the best product to start good credit history.
Some banks also offer secured credit card based on fixed deposit for people without credit history or low credit score. Applicant will have to open a fixed deposit account with bank. Bank will issue a credit card with 80% as limit of fixed deposit amount.
There are two basic reasons to apply for a credit card from credit history point of view.
1. To build a good credit history faster
2. To improve low credit score due many reasons.
After receiving a credit card, one need to use is responsibly. We strongly advised to keep a check on following 10 points to improve/ build good credit score. This will help you save interest on amount used through a credit card. This is equally applicable in both scenarios.
It is important to pay credit card bill and other loan EMIs on payment due date. Your payment behavior is biggest influencer to your credit score. Paying credit card bill on or before payment due date improves credit score. Not Paying or Paying EMI / Bill amount with delay indicates irresponsible payment behavior. A 30 days delinquency can reduce you credit score by 100 points. For Loan EMIs always ensure you keep sufficient balance in your bank account one day before your EMIs due date.
We Strongly recommend you to link your credit card bill payments with your salary account or saving account. This will automatically clear the credit card outstanding in full amount if sufficient balance in available in the account. This will safeguard you from forgetting to pay your credit card bill on payment due date.
Credit Utilization Ratio
Keeping credit utilization in control in golden rule to follow. you should always avoid high credit utilization, this indicated that you are at higher risk of default. We advise you to keep your credit utilization up to 30% of your credit limit. This means if you have credit limit of Rs. 50,000/- then your credit utilization should be under Rs. 15,000. Credit. Credit utilization ration above 50% can have negative impact on your credit score.
You should always ensure that you pay your credit card bill outstanding before payment due date even if the amount is small. Any unpaid due amount effects credit score negatively. It is advised to pay off your outstanding amount in full before payment due date to keep improving you credit score.
Paying Minimum Amount Due
MAD (Minimum Amount Due) is smaller amount of the total outstanding bill. Minimum Amount Due is just 5 % of your total outstanding. Keeping paying MAD is a debt trap which cost very high to user. Rolling over the debt by paying only minimum amount leads to interest compounding on your outstanding balance.
We strongly advise you to pay your credit card bills in full on or before your payment due date. It also reflects poor repayment behavior and effects your credit score negatively.
Multiple credit application
When you apply for a loan or a credit card, lender will check your creditworthiness by pulling your credit report. All such queries are report to CIBIL. Applying with multiple banks at same will reflect multiple such queries and affect your score negatively.
Even if your loan / credit card application is rejected in recent time. It’s advised to not to apply immediately. It’s advised to wait to improve your CIBIL Score and then apply again.
Right Credit Mix
Its important to have right mix of secured loans (Car Loan, Home Loan) and unsecured loans (Personal Loan, Credit Card). If you have a high number of only one type of credit, it can affect your score. When you have a healthy and right mix of different types of loans, it indicates that you have experience in handling both different types of loans. This is highly desirable by bank.
Errors in your CIBIL
If you any discrepancies in your CIBIL report, you must get them rectified immediately. This kind of errors can hamper your score. All such discrepancies to be rectified by your lender only CIBIL does not correct such report without lenders reporting changes to be made.
checking your credit report can also help you identify if you are a victim of an identity theft. It is important to check your CIBIL score from time to time. Make sure your score is above 750 to enjoy better access to credit products. You are entitled to receive one detailed credit report for free from CIBIL per calendar year.
Length of Credit History
If you have a long credit history, it helps lenders take a sound decision at the time of offering you credit. It is better to focus on building a credit history in the earlier stage of life by the time you apply for home or car loans. You will have good records of credit transaction
Closing Old Credit Card Accounts
Credit cards are a great tool to build credit history. However, when you close your old accounts, you end up losing a long credit history associated with it. Therefore, if you have used the card for a substantial number of years, it is advised to keep it open as long as possible, if feasible. Consider closing a card that is relatively new.
Pay Your Utility Bills Using Credit Card
We advised you to pay all your utility bills i.e., electricity bill, mobile bill, patrol bill using credit card. These amounts being small in nature will ensure your credit card utilization below 30% of credit limit. Keeping your credit card bill payment linked with your salary or saving account will help you to pay your credit card bill before payment due date. Such good transaction happen on regular interval basis helps you to improve and build good credit history/ score. Keep striving for it.
Help us with your feedback in comment section.
Disclaimer: Credit Card approvals are at the sole discretion of Issuing Bank Ltd. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.