How Credit Card Impacts Your Credit Score?
Updated on: Jun 7th, 2024
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2 min read
Credit score determines your trustworthiness to a lender and helps the lender determine if you deserve getting a new credit facility or not. The way you manage your credit card transactions has a direct effect on your credit score. Here is how they are connected:
Card Payments: Missing credit card bill payment due date will negatively impact your credit score. Even a single missed payment will be recorded in your credit history and affects the score. The number of days the payment was delayed will be recorded in the report. Making payments on time will especially become important if your credit score is already low. Keep up with on-time payments for a minimum period of 6-8 months to see a positive change in your score.
Credit Utilisation Ratio: As you may know, credit utilisation ratio is the amount of credit availed from a given limit, calculated as a percentage. If you have multiple credit cards, it will be calculated based on the total credit limit available from all the credit cards. It is said that the lenders prefer an applicant with a credit utilisation ratio of less than 40% of the total limit. Therefore, keep the utilisation ratio low in order to look creditworthy.
EMI-to-Income Ratio: EMI-to-Income Ratio also plays an important role here. The monthly loan and credit card repayments divided by your income must be a maximum of 50% as lenders assume that half of your income is required for your living expenses. If your credit card bills exceed 50% of your income, lenders will not be pleased about your spending habits and it negatively influences your credit score.
No Credit History: If you do not have a credit card or a loan so far, your credit score will remain ‘Not Applicable (NA)’ or ‘No History (NH)’. Therefore, it is advised to begin building a credit history as soon as possible by signing up for a credit card. Keep your spending habits in check and make a few transactions with the credit card. Pay your bills on time so that positive credit history is built. This will help you gain a good credit score.
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