Most people blame their credit cards as the main reason why they have poor credit scores and are heavily in debt. However, this is simply not true and the main reason for being in debt and having bad credit is due to poor financial discipline as well as a lack of control. When you choose a good credit card, it is a tool that can be used to actually improve your credit rating. We will now look at how you can go about doing so.
1. Build credit history using your credit card
The majority of lenders typically prefer to lend and many of them only lend to those who have had a credit card or have taken a loan sometime in the past. This is because it shows your repayment behaviour as well as how much risk you pose. With that said, you should not just take out a loan in order to have a credit history as there are certain extra costs as well as interest to pay. As a result, one way to build your credit history is to get a credit card. This is quite different from taking a loan since you won’t have to deal with interest once you regularly pay off any outstanding amounts on your card. Credit cards are essential zero cost finance and you can even benefit from reward points, discounts and even more. Once you select a good card and properly manage it, the benefits are certainly more than worth it.
Business lending firm Max funding says,”if you can’t get a normal credit card then it may be best to start with a secured credit card.” They explain “these are basically credit cards that are given against fixed deposits and as much as 85% of the principal is available on the card. “
2. Pay on time
Next, your credit score is affected by your credit card because the institution that you have the credit card with actually reports your activity to the bureaus so that they can constantly calculate as well as update your credit rating. If you have many delays or defaults on your payments, then this will lead to your credit rating being lowered. However, when you do repay consistently, then this is seen as being positive by the bureaus and your credit score is increased. Therefore, whenever you use your credit card, make sure that the amount you owe on your card is paid before the due date arrives. You can also convert what you use wholly or partially into EMIs if the outstanding sum is too large and you can’t pay all by the due date.
3. Keep credit utilisation ratio only up to 30%
Credit utilisation ratio is actually the percentage of your credit that you personally use. The majority of lending institutions prefer to only give loans to people who keep their utilisation ratio within 0 – 30%. If your utilisation ratio is higher than 30% then you will be perceived as being riskier to lend money to due to appearing credit hungry. So, if you have a low utilisation ratio, your credit rating is actually increased. In the event that you personally go above 30% utilisation, then it is best that you ask for a credit increase by your bank or financial institution. Alternatively, if this increase request is not approved, then you should simply ask for another credit card.
4. Don’t apply for many credit cards within the same time period or within a short time span.
If you do this, then your credit rating will be reduced by a couple of points. This is because each credit card application results in a credit report so that the bureau and financial institutions can determine how worthy of credit you are. As a result, these enquiries are also placed on your actual credit report and every single enquiry results in a reduction of your credit score by a couple of points. So, instead of making multiple credit card applications with different financial institutions, you should go online and check out the financial marketplaces there and then compare the different credit cards that are available and the features of each one. Even though these will also require your credit score to be fetched, these are not seen as hard enquiries but rather soft ones and they don’t reduce your credit score.
5. Carefully close old credit cards
Most credit bureaus take into consideration the age of your credit facilities which also means your loans and credit cards when they determine your credit score. So, if you close any old credit cards you may have, then this also reduces the credit facilities length which also causes your credit rating to decrease. Additionally, when you close credit cards, it also lowers your credit limit. If this lowered credit limit makes your utilisation ratio to be more than 30%, then this will also cause a reduction in your credit rating. So, to prevent these negative impacts due to closures, you should ask your other card card issuers to actually increase the current credit limit on your other cards.