Using a Credit Card to Build Credit History
Your reputation as a borrower is what decides whether you will be eligible for a loan or not. Now, this reputation is dependent on two things, credit score, and credit report. Now, these two things reflect your repayment capacity and your behaviour as a debtor. Your credit history is a proof of your creditworthiness. A good credit score allows your bank to trust your repayment capacity.
So, if you are planning to build or restore your credit profile, then using a credit card is a great way to do that. Even though it seems confusing, if you know how to use a credit card, then it is easy for you to build your credit history.
This article talks about 4 tips that will help you to build your credit profile with a credit card.
4 tips to build your credit profile with a credit card
Here are some tricks to use your credit card to your advantage and build your credit profile.
- Pay the bill fully and on time
Your credit score is a quantitative measure of your debt management skills, and it establishes your creditworthiness and credit-handling capacity. It mainly focuses on how you borrow money and pay it back. Therefore, make sure all debt payments are made on time to maintain good credit.
Now, your credit score can be poor if you’ve never borrowed money as you have no credit history to work with. If you have never taken out a loan, such as a personal loan, making frequent purchases using a credit card and making timely payments will help you establish a positive credit history.
Make sure to settle your outstanding credit card debt each month. Your timely payments are reported to the credit bureaus by your bank. You can also prevent having to pay interest by making a full payment instead of a minimum one.
A person’s credit score might easily be up to 35% based on their payment history. So the first step in using your credit card to improve your credit score is to use it frequently and ensure that credit card bill payment are on time and in full.
- Keep your credit utilisation ratio low
The credit utilisation ratio significantly influences your credit score, and this is the second-most significant aspect because it contributes roughly 30% to your credit score.
While you must consider your overall debt, credit rating agencies also consider your credit utilisation. The amount you owe as a percentage of your total credit limit is known as credit usage. The greater this ratio, the more likely you have taken on too much debt and could miss payments. This is why we advise keeping your credit card balance low. Make sure to keep your percentage below 30% to 40%. Moreover, having a high credit utilisation ratio also represents you as an irresponsible borrower, which can also negatively affect your credit profile.
- Have an emergency fund on hand
When you’re tempted to make large purchases, getting caught in a debt trap of credit cards is simple. This will make you struggle to make timely repayments, affecting your credit score negatively.
Keeping a dedicated emergency fund in hand is the best approach to breaking this cycle. In this manner, you can continue using your credit card for unanticipated expenses while paying your bills promptly and in full, preventing a debt cycle. Moreover, this will also help to maintain your credit score and increase it as well.
- Avoid closing old credit cards
Another trick of using a credit card to your advantage in building a credit score is not closing any older one. The reason being these cards will have a significant payment history attached to them, and closing them will eradicate that. Hence, you will notice a drop in your credit score.
Also Read: Steps to Apply for a Credit Card With No Credit History
Conclusion
Your credit score can be increased using credit cards, especially if you use them wisely. Use credit cards while keeping your payments on time to establish good credit. You can raise your credit score by only using a small fraction of the available credit card limit.
Remember that using a credit card to improve credit might have drawbacks. Using it wisely can do wonders for your credit and guarantee an excellent future credit score. But it can significantly affect your credit score if you can’t control your expenses and fail to make timely payments.