How Credit Card Can Increase Or Damage Your Credit Score / Credit Profile



Have you used up your credit card, which means you are no longer authorized to make payments with your credit card? Credit card holders often want to reduce their interest expenses or free up part of the credit limit. Where a credit card on the one hand is an effective tool for an individual to improve their credit profile, its careless use can make the same worse, say wealth planners. Financial products such as credit cards affect a borrower’s credit profile or creditworthiness. Banks and other financial institutions assess, among other factors, an individual’s credit rating to decide whether the loan to the applicant will be lucrative.

Here are five things to know about using credit cards:

1. What is solvency? Why is this important?

A credit card is a financial instrument that opens a line of credit for the cardholder – or cardholder – to borrow funds from a financial institution against payment of interest. Once a financial institution opens a line of credit to the borrower, the cardholder can use it to make a payment to a merchant for goods or services.

Credit reporting companies provide banks with records of payments made on loans and credit cards by individuals and business entities. Creditworthiness – or a borrower’s ability to repay a loan – is reflected in a borrower’s credit rating.

(Read also: How Credit Cards Can Make or Break the Credit Profile)

“A credit card cycle allows you to access credit when you need it, gives you a bigger repayment window, and helps you build your credit score only if you make quick and timely repayments,” explains Sujata Ahlawat, vice president and head of interactive DTC at TransUnion CIBIL, a credit information company.

“Regular repayments will showcase your good credit behavior and help build a positive credit footprint, thereby improving your credit profile and CIBIL score. “

2. What is a credit card cycle? How can it be used to strengthen the credit profile?

A credit card cycle is the period between bills issued by a lender to the credit card holder against any unpaid dues. In other words, it is the period between invoices. Usually, the credit card companies bill the cardholder every month. A credit card statement has two dates, the invoice date – the date the invoice is generated – and the payment date – the date until which the credit does not generate interest (this is also the date of payment). ‘deadline for the credit card holder to make the payment). The payment date consists of a grace period which is generally 15 days after the generation of the invoice.

A credit card cycle – or credit card billing cycle – can help a person build their credit profile, according to wealth planners.

“Practically, you have 45 days to pay an unpaid due date without paying interest. If a user pays the full amount of the unpaid amount, he does not accumulate any interest or fall into the debt trap, he is able to to build their credit profile and at the same time enjoy the loyalty benefits that credit card companies offer their users for the use of their cards, ”says Rahul Agarwal, director of Wealth Discovery.

3. How long does it take for credit card discipline to be reflected in a credit profile?

A credit profile reflects factors such as payment history and credit usage. According to experts, it can take anywhere from six months to a year to develop a good credit rating.

“In the case of a new credit consumer, who may not have a credit footprint and therefore no score, a credit profile can be built over a period of 6 months. Other consumers can increase their scores thanks to fast, limited repayments and well-managed loan accounts, a good mix of credits and use of credit within limits, ”says Ms. Ahlawat.

(Read also: When to transfer your home loan to a new lender)

Payment history and credit usage contribute more than 50 percent of a person’s credit score, says Agarwal.

4. What other factors are used by a lender to assess an applicant’s creditworthiness?

Experts point out two other factors taken into account by lenders:

  • IME / income ratio: proportion of existing loans to monthly income.
  • Outstanding Contributions / Credit Utilization Ratio: A higher credit utilization ratio reflects financial stress.

5. Does an extended period of a maximum credit card affect the credit profile?

Financial experts advise paying off more than the minimum amount owed on a credit card bill. In other words, while late payment of credit card bills affects a customer’s credit profile, refraining from paying only the minimum required contributions adds to creditworthiness.

“A credit card cycle allows you to access credit when you need it, gives you a bigger repayment window, and helps you build your credit score only if you make quick and timely repayments,” explains Sujata Ahlawat, Vice President and Head of Interactive DTC, TransUnion CIBIL.

Paying the minimum amount owed can be seen as a sign of “financial strain,” she explains. You must “pay the full amount on the payment due date to avoid any negative impact on the credit profile and CIBIL score,” adds Ms. Ahlawat.

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