Credit card is an important financial tool that almost every one of us uses. It is a great way of spending and collecting points which you can spend again.
Credit cards and credit scores have a big impact on each other, in many ways, and both of them are also connected.
Credit card is issued by evaluating your credit score and credit card payment and history impacts the credit score.
In this article, we will find out how credit cards impact your credit score, but first, let’s find out what is credit score.
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What is a Credit Score?
A credit score is nothing by a metric system that banks and other financial institutions use to evaluate an individual’s credit-taking capacity.
There are three credit-evaluating companies in India- CIBIL, Experian, and Equifax.
All three of them score an individual’s financial Credit borrowing capacity anywhere from 300 to 900. 300 being the lowest and 900 being the highest.
A good credit score is anything above 750 which not only increases your chance of getting a loan or credit card but also helps you in building a positive credit score impact on your profile.
How Do Credit Cards Impact Your Credit Score?
Here are some of the important impacts that credit cards can have on your Credit score-
Credit Utilization Ratio
Credit Utilization Ratio is a ratio that determines the total credit utilized by the individual as per the available credit. Let’s say you have 2 credit cards one with a credit limit of 50,000/- and another with 50,000/- so, your total credit limit is 1,00,000/-.
Out of these let’s say, you have spent 60,000/- using both of your cards then the credit utilization ratio tends to be at 60%.
The ideal credit utilization ratio should be in the single digits or at max below 30%. The single-digit credit utilization ratio puts your profile in a very advantageous place and you should always try to maintain this.
Credit Inquiry
Whenever you apply for a credit card, a hard inquiry is generated towards your credit score. This may impact your credit score positively or negatively depending on your various factors.
As a best practice, you should not apply for credit cards one after another especially if they are rejected. This impacts your credit score negatively and you may lose a few important score points.
Debt History
If you use your credit card regularly then this helps you maintain a credit history for your profile which helps the credit rating agency to score your profile well.
As a best practice, you should use the credit card wisely and spend it now and then. This not only helps you in gaining reward points but also helps you in generating credit history.
Increase Credit Mix
There are different types of loans and credit available to you. Credit mix evaluates this and helps in determining the diversity in your credit availability.
Credit scoring agencies also look at an individual’s credit mix and evaluate the credit handling of the individual and the availability of the credit to him/her.
If you have a diverse credit availability then your credit score will improve and help you in building a good profile.
FAQ
Credit card utilization refers to the percentage of your available credit that you’re using. Keeping this ratio low, ideally below 30%, demonstrates responsible credit management and positively affects your credit score. High utilization can indicate potential financial strain.
No, Closing old credit cards can potentially harm your credit score. The length of your credit history contributes to your score, and older accounts show your creditworthiness over time. If the card has no annual fee, consider keeping it open to maintain a longer credit history.
While opening a new credit card can initially lower your average account age, it could also increase your total available credit, potentially lowering your overall credit utilization. However, applying for multiple new cards within a short period can lead to hard inquiries that might temporarily affect your score.
When you apply for a new credit card, the issuer typically performs a hard inquiry on your credit report. Multiple hard inquiries within a short time can lower your credit score. Soft inquiries, like checking your credit score, don’t affect your score.
Most credit card-related factors, such as payment history and credit utilization, can have both short-term and long-term impacts on your credit score. Late payments can remain on your credit report for up to seven years, while positive behaviors can improve your score over time.
I’m Shiv Kumar, a graduate with a passion for finance, marketing, and technology. My journey into finance started with a desire to understand money management and investing.
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