Today’s economy is heavily dependent on credit. Especially with Gen Z, almost every small or big purchase is made via a credit card. A credit card can be very viable if used correctly and smartly. A credit card is also a great way to build the length of your credit history and have an advantage when you apply for a loan or a mortgage. However, it is important to understand how it can impact your credit score and your line of credit.
What is a credit profile?
Your credit profile is a portrayal of your credit history for lenders. It tells them how reliable you are and helps them decide whether you are qualified for a new credit. How you have handled your credit transactions in the past determines what your credit profile will look like. A good credit profile is extremely important for a good credit score.
Why is a good credit profile important for credit score?
A credit profile tracks your loan history, the types of credit you use, the length of your credit history, and whether you’ve made payments on time. Based on this data, credit bureaus calculate your credit score. A higher credit score not only improves your chances of securing loans with lower interest rates but also allows you to access premium financial products, such as one of the best RuPay credit cards. Your credit score reflects your reliability in repaying loans, which is a critical factor lenders consider during the loan approval process.
How do credit cards impact credit scores?
Credit cards can completely make or break your credit profile. A prudent use of a credit card is essential for a good credit score. Let’s have a look at how a good credit score for a credit card can be maintained:
- Payment History – Did you know that payment history makes up to 35% of your credit score? The main way to maintain a good credit score is by paying your EMI on time. Payment delays can reflect badly on your score.
- The Immediate Impact: Hard Inquiry – When you apply for a new credit card, the issuer will perform a hard enquiry on your credit score, these enquiries make up to 10% of your score. This is done to see how worthy you are of a new card and what has your history with credit been like. But this may dip your score by a few points and too many hard enquiries in a short time may suggest to lenders that you are in financial distress.
- Card Payments – Every missed payment is recorded in your credit history. Making payments on time will help your score. If your score is low and you continue to make timely payments, the score will improve in 6-8 months.
- Length Of Credit History– Length of your credit contributes to 15% of the score. Lenders want to see that you can deal with debt well for a longer period. That is why it is advised to keep your old credit cards open. Closing them shortens your credit history since only active cards are taken into account. So even if you are not using the cards, keep them open to maintain a good score.
- Credit Utilization Ratio – This makes up to 30% of your credit score. The credit utilization ratio is calculated as a percentage. Depending on the amount of credit used from the given limit. If you have multiple cards, the total limit will be taken into account. It is believed that lenders prefer less than 40% usage of the credit limit. Therefore, utilization should be low to be creditworthy.
- EMI-to-Income Ratio – Monthly loans and credit card repayments divided by your salary should be 50% max as lenders believe that half your income is needed for your living expenses. It is a red flag if you come across as a spendthrift whose salary entirely goes into paying the credit card bills.
- Adding to Your Credit Mix – Credit mix and credit scores go hand in hand as well. Credit scoring models prefer a diverse variety of credit types, like cards, loans, mortgages etc. Your credit mix makes up to 10% of your credit score. Adding a new card like the RuPay Credit Card can have a positive impact on your credit mix. The best mix of credit cards and a diverse credit profile shows lenders that you are capable of handling various credits responsibly.
Wondering What a Good or Bad Credit Score Looks Like?
- Poor credit: 300-579
- Fair credit: 580-669
- Good credit: 670-739
- Very good credit: 740-799
- Excellent credit: 800-850
How to Maintain a Good Credit Score?
Building a good credit score is a start but the real benefit is when you can maintain it. You can do that by simply maintaining the good credit habits that helped you get a good score in the first place. Keep your utilization to a bare minimum, and pay your EMI and bills on time. Don’t close old credit cards, keep your credit utilization to less than 30% of the available limit.
