A credit score is a very important requirement when you look for loans for meeting your financial requirements. The score represents the measure of credibility that you have. It shows the lender how likely you would be able to repay the debt after availing it. If your score is 650 and above, it is considered to be good and lenders readily allow you the loan that you seek.
A credit score is built if you have availed loans or credit in your name. In fact, if you don’t have loans but are using a credit card, you can build and improve your credit score. Here’s how –
- Make regular payments of your credit card bills
The first rule of building a good credit score with a credit card is to pay the credit card bills on time. As you pay the bills within the due date, you don’t default on your payments. The primary constituent of your credit score is your default history. When your payments have not defaulted, your credit score improves while missing your credit card bill payments has a very bad effect on your credit score.
- Pay your credit card bills in full
Credit cards allow you to pay a minimum amount due on your credit card bill and revolve the remaining balance to the next billing cycle. While this revolving credit facility is good in a financial crunch, you should stay away from it. Revolving credit not only attracts high-interest charges, but it also hampers your credit score. So, if you always pay your credit card bills in full, you can build a good credit score and also avoid high-interest charges.
- Limit your expenses below the credit limit allowed
Credit cards allow you credit limits up to which you can do credit transactions. These limits are like pre-approved loans and you might be tempted to transact up to the allowed credit limit. This should not be done. Limit your credit expenses below the credit limit. When you do so your credit utilisation ratio is low. A low ratio helps in building a good credit score as credit utilisation is a part of your credit score calculation.
- Use multiple credit cards
Every credit card offers you something different and so it is a common practice among many of you to own multiple credit cards. If you do own multiple credit cards, maintain them. Do not close the accounts of old cards which you seldom use. Maintaining multiple cards would increase the credit limit allowed to you. A high credit limit would reduce your credit utilisation ratio which would be good for your credit score calculation.
- Manage your credit expenses
The last tip is to spend only what you can afford. Since credit cards allow you credit transactions, many times you might be tempted to splurge. Resist this urge to splurge as a high credit bill would be difficult to pay off and you might end up defaulting on the credit card dues. The default is bad for your credit score and so your credit expenses should be managed.
When you follow these tips you can build a good credit score by simply using your credit card wisely.