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While most of the card issuers require you to have an active credit profile, some banks like HDFC may issue select credit cards to those who are new to credit.

How Credit Cards Help You Build Your Credit Score
Monday, November 23, 2020 - 10:55

When you apply for a credit card, your card issuer will judge your application on a number of factors such as age, income, occupation etc. But before all these factors, your credit score and credit report are checked. Your credit report helps banks or NBFCs learn about how you have managed credit in the past. If you have effectively managed your credit and made payments on time, you are likely to have a good credit score and to get approved for a credit card.

While most of the card issuers require you to have an active credit profile, some banks like HDFC may issue select credit cards to those who are new to credit. If you are new to credit and apply for HDFC credit card online, you are most likely to get a basic card such as HDFC Moneyback or HDFC Freedom. However, if you have a credit history of about 5 years, you may be eligible for their premium range cards such as HDFC Regalia, provided you meet the income and other requirements.

Credit cards can be very helpful in building your credit profile from scratch or repairing a bad credit score. All you have to do is make bill payments on time and maintain a low credit utilization ratio.

So, before we talk about how you can use credit cards to build your credit score, let us first understand what credit history and credit score means.

What Are Credit History, Credit Reports, and Credit Scores?

Your credit history is the record of your past behavior as a borrower. Lenders use this past behavior to determine how likely you are to pay the money back. When you apply for a credit card or loan, a lender will check your credit reports and scores to determine how likely you are to pay back a debt.

Credit history is recorded in the form of credit reports. Each credit bureau collects and maintains data about your credit history in the form of a credit report, which can be accessed by you as well as the lenders (when you authorize them to). Your credit reports contain information about accounts you have had and your payment history.

A credit score is a number that indicates your risk as a borrower and the likelihood that you will pay your bills timely. Many popular credit scoring models use a range of 300 to 850. A “good credit score” is typically anything above 700, but this is subjective.

Best Ways to Use a Credit Card to Build Credit

A credit card can either help you build a positive credit or hurt your credit- it all depends on how you use it. Below we have listed the best ways to use your credit card to your benefit:

1. Pay your credit card bills on time

Make your credit card payment in full and on time. Bills that go unpaid will be reported to the credit bureaus, which in turn, negatively affects your credit score. The number of days for which your balance remain unpaid is reported in the Days Past Due (DPD) section of your credit report. So, if your bills are overdue for 5 days, the same will be reflected under DPD and your credit score will be impacted.

2. Maintain a low credit utilization ratio

Credit utilization ratio is the percentage of your available credit limit that you use. We recommend keeping your credit utilization below 30% on all cards in order to maintain a decent credit score.

3. Periodically review your credit report

You should closely monitor your credit report and check for errors and discrepancies. Dispute any errors you find that might be lowering your scores.

4. Limit new credit applications

Avoid applying for multiple credit accounts such as cards and loans within a short span. Applying for credit card or loan can cause a small & temporary drop in your credit score and if you make multiple applications at once, this drop can have a lasting impact on your score.

5. Read and understand your cards’ terms and conditions

Read and understand your cards’ terms and conditions carefully as it contains all the important information about payment terms, interest rates, annual fees and penalties. For instance, penalties and finance charges start accruing when you miss the minimum due on your credit card. This can lead to a debt spiral and further lead to missed payments. All this can have a heavy impact on your credit score.

6. Read your monthly statements carefully

It is necessary to check all the information listed in the statement as it helps in keeping track of how you are making use of your credit card. If you have several EMIs active on your card, it may be a good idea to reduce further expenses on that card so that the total bill does not exceed your budget.

How are credit scores calculated?

Credit bureaus usually consider the following 5 factors while calculating your credit score-

  - Payment history (35%): Whether you have paid your past credit accounts on time

  - Amounts owed (30%): The total amount of credit and loans you are using compared to your total credit limit, also known as your credit utilization rate

  - Length of your credit history (15%): The length of the time you have had credit

  - New credit (10%): How often you apply for and open new accounts

  - Credit mix (10%): The variety of credit products you have such as credit cards, installment loans, finance company accounts, mortgage loans etc.

Bottom Line

Credit can be a powerful tool to help you achieve your financial goals. It's important to understand how it works, how to build your credit and how to ensure that your credit history always works for you.

Credit Cards, when used responsibly, can help you build and maintain a good credit record. It is imperative to maintain a strong credit record. Don’t spend more than your repayment capacity, keep credits available for emergencies and most importantly pay your credit card bills on time.