Efficient credit card management can either boost or bust your credit profile. This may negatively impact your credit score. A high credit score is a crucial factor in accessing loans and financial products nationwide.
Understanding and acknowledging how credit card activity influences your credit score is critical for maintaining a healthy financial profile. Credit cards can be referred to as credit tools that help provide users with credit lines, i.e., ways to borrow and then repay within the stipulated time. That is why their prudent management and timely payment of credit card bills are vital for sustaining a strong borrowing profile.
Simple credit card moves that improve your credit score
1. Stay on top of payment history: Payment history is the most powerful and impactful element of your credit score. This makes up about 35% of your total credit score. Proactive setting of alarms or repayment reminders, on-time clearance of credit card bills, personal loan EMIs, whether through UPI or traditional means, helps in building a strong credit record and borrowing integrity. Missing these vital payments even once can cause a steep drop in your credit score.
2. Keep credit utilisation low: Your credit utilisation is nothing more than the percentage of your credit limit you use. This is another vital factor that must be taken into account. It accounts for roughly 30% of your total credit score in the metrics of various leading credit bureau agencies. Experts recommend keeping this ratio below 30% to avoid signalling credit dependency.
For example, if your total allowed credit limit on your credit card is ₹2,00,000, then you should strictly ensure that you never exceed ₹60,000 in outstanding balance at any time. Such a simple approach will ensure that you are never looked down upon as a credit-hungry individual with over-reliance on debt to meet day-to-day expenses.
3. Think twice before closing cards: Closing a credit card, especially your oldest one, can raise your utilisation ratio if your total available credit shrinks, thereby hurting your score. It also shortens your credit history, which is a medium-impact factor. Keeping long-standing cards open, even if rarely used, benefits your creditworthiness.
Closing a credit card can result in raising your credit utilisation ratio. Especially if the credit card you close is one of your oldest. This can temporarily hurt your credit score. It also shortens your overall credit history, which is a medium-impact factor. Keeping long-standing credit cards open, even if rarely utilised for transactions, benefits your creditworthiness.
The only point that you must consider is the annual fee associated with your credit card. In case there is no annual fee or it is waived off due to a promotional scheme, then you should try not to close your credit card quickly rather try to make the most of it and boost your credit history.
4. Diversify credit for a healthy mix: A good credit mix, including but not limited to different types of credit options such as personal loans, home loans, credit cards, and education loans, can all cumulatively influence your credit score positively, if the borrower demonstrates sincere repayment history for years together without defaults or missed payments. Lending institutions appreciate evidence that the borrower can manage various financial obligations responsibly.
Tips for smart credit card use
- Always pay credit card bills on time, preferably in full. Don’t fall for the trap of minimum payment.
- Keep credit utilisation under 30%. Never exceed it.
- Avoid multiple credit card or loan applications in a short span to prevent hard inquiries.
- Maintain older credit card accounts active to maximise credit history length.
- Monitor your credit report regularly and dispute inaccuracies promptly.
With credit card issuances rapidly surpassing 108 million by December 2024, and demonstrating steady growth by mid-2025, reaching 111.19 million. This surge in credit card usage, coupled with consistent RBI guidelines focusing on transparency and consumer protection, underlines the growing vitality of informed credit card management.
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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.