A strong credit score can help get loans and credit cards approved easily and may also reduce your overall cost of credit when credit is required in future. Thus it becomes imperative to build and maintain a high credit score.
It is a myth that you cannot have a credit score without a loan. You can build your credit score with credit cards as well. Even if you haven’t availed a loan earlier, credit cards can come handy in building a strong credit score. Loans, be it secured or unsecured, say personal loan or home loan, are need-based products and everyone may not have availed it before.
A credit card, on the other hand, is a multi-faceted product that not only acts as a payment instrument, but also provides credit services making it a choice-based product which can be availed as a choice. In this article, let us understand how you can build your credit score by just using credit cards only.
Important Points that can Help Build Strong Credit Score
A disciplined credit behaviour while using credit cards can help scale your credit score and maintain it at a high level. Here’s how to do so:
1. Repay by the Due Date
You should repay all dues by the due date every month. Missing even a single repayment has potential to lower your credit score. Missing payment deadlines regularly will reduce your credit score significantly. Thus always pay all dues in time without fail.
2. Keep Credit Utilisation Ratio (CUR) Low
The percentage of total credit you utilise against your total available credit limit across all cards is known as credit card utilisation. You should keep your credit utilisation low. A high CUR regularly shows you are overdependent on credit and thus the risk of default is high. Experts recommend to keep your CUR below 30% as it will help build your credit score in the long run.
3. Avoid Paying Minimum Amount Due (MAD) and Pay in Full
A default is not marked when you pay the minimum amount due. But your partial payment may invite high interest rates on your spending. This will increase your cost of credit and you will be trapped in the debt cycle. Thus, you should avoid paying the MAD and repay the total amount at the end of every billing cycle.
Suggested Read: Should You Pay Only the Minimum Amount Due on Your Credit Card
4. Refrain from Applying for Credit Cards Too Often
Every credit card application with the card provider is considered a hard enquiry and is mentioned in your credit report. A lot of enquiries over a short period of time shows your hunger for credit and your credit score may fall significantly, albeit for a small duration. Instead, do proper research and apply only for the card that suits your requirements and where all eligibility criteria are met.
5. Don’t Close your Oldest Active Credit Card
If you have used your oldest active credit card smartly over years, you should not close your credit card. A longer credit history gives a lender better access to your credit habits and is thus perceived to be better. Also, closing your oldest active credit card will increase your credit utilisation ratio which can eventually lower your score.
Suggested Read: How Credit Score Impacts Pre-approved Offers
If you follow the suggested points, you can build a strong credit score with just your credit cards. It will also help you maintain a strong credit profile which will help you get pre-approved loan and credit card offers.
How can New-to-Credit Consumers Benefit by Using Credit Cards
New-to-credit customers are those applicants who have never availed any credit product and are thus difficult to be assessed for the risk of lending. They don’t have a credit score and many lenders and credit card providers refrain from approving their credit card or loan application. They end up not getting the best loan or card offer and thus have to pay higher cost of credit along with stringent rules and regulations.
If you are new-to-credit and want to be future-ready for best loan and credit card offers, you can start building your credit score beforehand and maintain a high score. It can come handy in times of emergency or when you want to fulfill a life-goal. Here’s what you can do:
1. Apply for a Credit Card with the Existing Bank
You should apply for an entry-level credit card with the bank where you already have an existing financial relationship. Most banks prefer approving entry-level credit cards of existing customers. Once you use this card and build a strong credit profile, you can apply for a better credit card in the future.
2. Get a Secured Credit Card
A secured credit card is issued against a fixed deposit and the card provider does not request credit score of the applicant at the time of approval. You can use this card to build your credit score.
3. Follow Disciplined Credit Behaviour to Build your Score
When you are new-to-credit and get a credit card, start using it in a disciplined manner to build your credit score. Don’t overspend, repay on time, keep utilisation low and check your credit report to see if your score has been generated or not.
Also Read: New-to-credit: Why your first credit product matters
Thus, you should use your credit cards wisely and build a strong credit score over time and stay eligible for pre-approved loans and credit card offers apart from high-ticket loans to fulfill your life goals such as home loan, education loan or car loan.
