Nowadays, using credit cards has become an integral part of our financial life as the benefits they offer are unavoidable. These cards, also known as plastic money reduce the financial burden of consumers with their policy of buy now and pay later. Having a credit card gives you the freedom to shop without worrying about your expenses.
However, in the midst of all benefits, don't forget that these cards must be managed wisely. If you fail to do so, your credit score will be affected negatively.
CIBIL score is the crucial element that displays your financial health. Furthermore, not only in a home loan or any other loan application but this score also plays a vital role in the approval or rejection of your credit card application form.
Here are the different factors that influence your credit score.
Repayment History
Your repayment history is one of the essential elements that affect your score by nearly 35%. Paying your outstanding bills and EMIs in a timely manner is important to maintain a good credit score. Also, if you have a history of missed payments, you will be considered a defaulter, which will negatively impact your credit score.
Whenever you apply for a credit card or personal loan, the first things that any financial institution takes into consideration is your credit score. If you have an organized payment history, it will prove you as a trustable person.
Holding Duration of Your Credit Card
Another factor that can affect your credit score is the holding period of your credit card history. A card that you've had for a few years vs one that you've just used for a few months can provide deeper information about your buying habits and is, therefore, more beneficial to your credit score.
Credit Utilization Ratio
The credit usage ratio is a percentage that indicates how much money you have spent in relation to your credit card limit. This ratio accounts for around 30% of your credit score. Overspending and exceeding your credit limit will significantly hurt your credit score. Maintaining a low credit usage ratio, on the other hand, demonstrates that you can effectively manage your spending.
Multiple Credit Cards
Although using many credit cards might enhance your financing limit, it can also harm your credit score. Maintaining many cards and keeping track of their outstanding invoices or dues can be difficult, resulting in missed payments and a negative impact on your credit score. As a result, having a limited number of credit cards is recommended in order to successfully manage them.
Hard Inquiries
When you apply for a credit card, your application is recorded on your credit report. Before approving or rejecting the application, a lender checks the applicant's credit report which is known as a hard inquiry. Multiple simultaneous inquiries in a short period of time will affect your credit score severely. Hence, it's wise to limit your credit card applications.
Concluding Comments
Without a doubt, credit cards are the easiest way to purchase products without financial worries, but if they are not used responsibly, they may cause a slew of issues. Credit card usage and management that is disciplined can help you create a good credit score, which will help you achieve your life objectives and maintain long-term financial independence.