Credit Cards – From a credit score angle

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Credit Score

       Before we delve more into credit cards, a bit about a credit score. ( This brief para about a credit score is for it’s relevance to the rest of the post. I want to come up with a separate post about credit scores and credit reports in future.)

       As you may know, a credit score is a person’s creditworthiness defined in terms of a figure. A report containing such score is called a credit report. It shows how creditworthy a person is and most banks and other financial companies use it to determine the loan eligibility of a person. There are companies which provide such credit reports and they are called Credit Information Companies (CICs). You may have heard about ‘CIBIL Report’. Here, CIBIL is one such company. There are other companies too, like Equifax, Highmark, Experian etc… These companies use data provided regularly by banks and NBFCs to generate credit reports of a person on demand whenever he/she tries to apply for any kind of loan. These reports indicate a person’s capacity to borrow as well as details about his past and current borrowings. Based on this data a figure is calculated in the report (between 300 to 900 in a CIBIL report) depending on which a bank decides whether or not to sanction the loan to the respective applicant. In both CIBIL and Equifax reports a score above 750 is considered good, while a score below 650 is less likely to get you a better loan deal.

Credit Cards

         Although, the use of credit cards is on the rise among Indian people, those who don’t want to use them, mostly have lack of understanding and general negative notions. Excessive interest rates, various penalties, yearly fees, fear of unnecessary purchases and a debt trap are some of the things that make people wary about using credit cards. Of course, those points are all there as sets of rules and by carefully using your credit card, you will not have to pay a single rupee as an interest, a penalty or even a yearly fee for some cards. There have been many articles written about which credit cards are better in what way and how to use them to maximize benefits. Also, you would find articles regarding how to use credit cards so as to avoid penalties and getting into a debt trap.

        Credit cards are convenient, especially for the people who understand how to make the most of them. Besides convenience, there is one very important factor and that is the relationship between a person’s credit card usage and his credit report. It can make a weak credit report strong and vice versa. A kind of double edged sword! Let’s see how that is. As I said above, credit reports are based on the data provided by financial institutions(FIs) like banks. That data consists of various kinds of loan(including credit card) details that are part of a bank’s credit portfolio. It means a person’s credit card usage also gets reflected in the credit report. That makes credit card the easiest form of loan a person can take, which can affect his credit report. I said easiest, because now a days, even a fixed deposit of 20K-30K in a bank can get you an instant credit card. If you’re starting afresh (never took a loan in the past), your credit history will be nill as per the credit report. It may be difficult for you to avail a property loan or a personal loan with nill credit history. There are so many cases of loan rejection because of inadequate credit scores. A credit card can come to rescue in such cases. Avail an instant credit card over a fixed deposit, and with proper usage of 6-12 months you can strengthen your credit report enough to have yourself get offered other loan facilities. On the flip side, an improper usage can dent your credit score. Try skipping a month’s payment and your credit score is bound to go down. Complete non payment of credit cards dues can result in a ‘debt written off’ status which can damage the credit report for a long time to come and takes time to recover.

      But what does the term ‘proper usage’ actually mean? Simply paying the ‘total amount due’ on your credit card bill every month is good but to really help boost your credit score, you will need to keep a few extra things in your mind. Let us list them out…

Pay ‘total amount due’ every month.

      Needless to say, any outstanding amount past your payment due date attracts penalties and interest, which negatively affects credit score. So, always pay in full and not just a ‘minimum amount due’.

Do not use more than 33 percent of your credit card limit.

      Why 33 percent? It is not something like a magic figure or a ‘lakshman rekha’ but I chose the figure for the reason that most credit card limits are approximately three times a person’s net monthly income. So, using more than 33 percent means you are spending more than what you are earning. Beside, using too much of your credit card limit can make you look like a credit hungry person, which can have negative effect on your credit report.

Never withdraw cash from a Credit Card.

       Interest and a cash transaction fee are charged from the moment you withdraw cash from your credit card. You don’t get interest free period for such a transaction. Avoid completely unless extremely necessary.

Read Credit Card statements carefully

       Monitor your credit card statements closely. Have net banking enabled on it so that you can check your credit card transactions anytime, without waiting for a monthly statement. Verify that all transactions there are as same as initiated by you. Report to bank officials in case you find anything unusual.

Protect yourself from fraud

       This has been said many times over, but still, never ever give sensitive details (pin, cvv number, OTPs etc) of your credit card to anybody. If you do online transactions, verify the genuineness of a website. Do not reply to phishing emails and spams (saying you have won some kind of a lottery and in order to claim it you will have to provide your credit card details). There is no definite method by which you can avoid a credit card fraud, but by applying various security features available out there and staying vigilant about your credit card usage, you can protect yourself from being the victim of such a fraud.

       There are other tips too, regarding reward points and all that but as this post is specifically with respect to credit reports, I have limited the list to only those things affecting them.

       So, you see that getting a credit card may be easy, but its usage requires prudence. And by carefully using your credit card , you can make it a powerful tool to boost your credit score and strengthen your chances when you apply for other credit facilities.

Will be back soon…

 

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