Credit score is one of the most important determinants during your loan or credit card approval process. The higher your score, the more is your creditworthiness. The higher your creditworthiness, the lower the risk for a lender to provide you credit. Your credit score remains high if you have followed disciplined credit behaviour in the past.
To know if your chances of a loan or credit card approval are high or not, you should first check all eligibility criteria and documents required. In addition, you should check your credit score before applying for credit. You can do this online through various online platforms – Paisabazaar being one such platform where you can check your credit score for free without impacting it.
Lenders check your credit score at the time of loan approval. If your score is low, your credit application may get rejected. It can also hamper your chances of credit approval in future. If your credit score is low, you can take steps to rebuild your credit score and then apply for the credit product. There can be many ways to improve your credit score but one of the easiest ways to improve your score is by using credit cards. Let us understand how credit cards can help improve credit scores.
1. Using Secured Credit Cards
If you have old loan accounts due to which your credit score has dropped and you don’t have any active credit accounts to rebuild your score, you can opt for a secured credit card. This card is issued without considering your credit score and is issued against a fixed deposit. Use this card smartly and repay all dues on time to rebuild your damaged credit score.
2. Rapaying all dues on time
Repayment is the most important factor that is considered at the time of credit score calculation. Repay all dues against your credit cards by the deadline. It will show that you have become disciplined in making repayments and will help build your credit score.
Another important thing to consider is refraining from paying only the minimum amount due. It can give you extra time to repay your dues but it can build a huge pressure when the amount gets bigger.
3. Keeping Credit Utilisation Ratio Low
Credit Utilisation Ratio (CUR) is the ratio of total credit utilised by you to the total available credit limit. A low credit utilisation shows that you are not too dependent on credit. It is taken positively by lenders whereas a high credit utilisation ratio shows your overdependence on credit cards which eventually increases the risk of default. A credit utilisation ratio of up to 30% is considered a good ratio by lenders as per credit experts.
In case you want to spend more and are wary of breaching the 30% CUR, you can request your provider bank to increase your credit limit. A higher credit limit would lead to a lower CUR and it would positively impact your credit score.
4. Refraining from Applying for a New Credit Card
With a low credit score, most lenders and credit card providers may reject your credit card application. So, you should not apply for any new credit card. Any such rejection has the potential to lower your credit score even more. So, it is best advised to rebuild your credit score at present and apply for a new credit card only when your credit score improves.
5. Checking Credit Card Repayments in Credit Report
There can be certain instances where your credit card dues have been paid on time but it is not reflected in the credit report. The report may show “Not Paid” or “Payment Delayed”. These administrative errors can occur at the bank’s/bureau’s end that need to be corrected otherwise your credit score may dip. You can raise a dispute immediately and get it resolved at the earliest.
6. Closing the Oldest Active Credit Card
The length of credit history also plays a vital role in your credit score calculation. The longer the age of your credit history, the more information is available for lenders to assess your credit behaviour. It is advised to keep the oldest active credit card open and not close it as it may lower the age of your credit history and impact your credit score.
7. Closing the Credit Card and Not Settling Debts
You should aim to close a credit card by repaying all dues in case you find it difficult to handle multiple credit cards. Settling a debt will negatively impact your credit score whereas closing the card after repaying all dues is taken positively by lenders and credit bureaus such as CIBIL.
If you are a regular credit card user, you can follow the pointers mentioned above and improve your credit score by smartly using credit cards. If handled properly and in a disciplined way, credit cards can help improve your score significantly but if you are not diligent in using them, your credit score can spiral down making it very difficult for you to recover.
