Credit Card Basics to Build and Maintain a Good Credit Score
A credit card is not only a useful tool to pay for goods and services on credit, but it can also be used as a means to improve and maintain your credit score. A decent credit rating can open the gates for you to get a range of financial products. For example, lenders and banks will be eager to lend you money if you have a healthy credit rating. Subsequently, you’ll be entitled to a larger sum of credit, will receive it quickly and can avoid paying higher amounts of interest.
In contrast, if your credit score is bad, you’re likely to find it hard to obtain even a credit card. Large banks are also likely to decline your demands, and you’ll have no other option but to get money from other costly sources like licensed moneylenders and pawn shops.
If you’re anxious about improving your credit rating, adopt the following basic steps:
1. Avoid New Credit Card Applications One After the Other
There is no strict rule to this, but new credit card applications will often put you in the category of an unreliable customer from the point of view of the bank. Most banks have a different set of criteria and requirements that a customer needs to satisfy.
Every time you apply for a new credit card, it will be recorded on your credit report. Numerous enquiries in a short span of time can affect your credit score adversely, because that would indicate a high hunger for credit. Previous enquiries are recorded on your report two years from the date of enquiry. So it takes time for the effect to wear off.
2. Limit the Number of Lenders
Many of us borrow to purchase a new home or car. In addition to these, you may be holding three or four credit cards or personal loans. If you’re not careful, you’ll soon have to track various accounts. This is a dangerous situation, because if you forget to pay even one instalment, your credit score will be ruined. The practical approach here is to limit the number of lenders you borrow from so that it is easier to manage accounts.
3. Keep Your Credit Cards Active
It might seem inconsistent, but paying off your credit card bills and not utilising them afterwards is not enough. The primary purpose of having a decent credit score is to establish that you are using credit responsibly. Use your credit cards for the purpose they were intended, instead of using them irresponsibly. For example, if you have an entertainment card, then use it whenever you hang out with friends.
However, if you avoid using your credit card, the banks will be unable to make a good assessment. With inadequate credit activity, there is limited data about your credit behaviour and the status of your accounts. This means the credit bureau would find it difficult to assess you and give a realistic score.
4. Pay All Credit Card Bills on Time
Many cardholders believe that it is perfectly fine to postpone paying your credit card bills as long as you keep paying the late payment fees, which is false. If you fail to pay your dues 30 days after the due date, you’ll be put in the category of delinquent cardholders; and over time, your credit rating will be affected.
To avoid this mistake, keep a record of the dates on which you need to make the payment. If you think you’d be unable to pay an instalment on time, inform the lender prior to the due date.
5. Check Your Credit Report and Correct Any Mistakes
The credit score system is not fool-proof and mistakes might creep in. The mistakes could be in your credit data that may impact your credit score. To avoid the consequences of any such mistake, obtain your credit report from the bureau. Check your report carefully and if there are any mistakes pulling your score down, get them fixed.
It is prudent to check your report at least once every year. Take adequate measures to fix the problem and follow up regularly to ensure it is resolved. Otherwise, the fault will remain on your report and will eventually hurt your score.
Not everyone may be able to get a perfect credit score, but the good news is, it is totally under your control to reestablish your credit health.