Just as it takes time and determination to climb a mountain, it takes time and determination to conquer a mountain of debt. But if you’re equipped with the right knowledge and tools, the journey to conquering that mountain can be relatively smooth. So, here are some practical ways you can quickly tackle your maxed out cards and take your first real steps toward getting out of debt and maintaining a healthy credit score.
Many of you might get emails and notifications saying, ‘Your credit card is pre-approved’. But, do you know what such emails mean? Should you respond to such offers immediately or totally ignore them? Before you take any steps in a rush, let’s understand what a pre-approved credit card means.
What does pre-approval mean?
Credit card companies and banks always plan different ways to increase their customer base. Pre-approved credit cards are one such tactic used by most credit card companies. Credit card issuers often send out emails or letters to prospective customers labelled as pre-approved applications. Before sending out such emails, the issuer will first do a basic screening process to see if you have a fair credit score. If you meet the criteria, your name will be on their mailing list. If you receive such mails, think of this as an invitation and not an approval for the same.
It’s a fact that such deals can be tempting, but as a user, you should be very smart on how to react to such marketing strategies. So, first things first, you should ensure to read all the terms and conditions carefully before applying. Understand their T&Cs well before taking any action!
Related Reads: 5 Major Ways Credit Cards Affect Your Credit Scores
Does applying for a pre-approved credit card hurt your credit score?
If you choose to respond, you can follow the process given in the mail. But, note that when a credit card issuer sends you an email or letter saying you are pre-approved for a credit card, it does really mean you will get the card as soon as you respond. When you apply, a level of inquiry will be conducted on your credit profile in order to assess your creditworthiness. The issuer will further judge you based on your current income, credit history, number of credit accounts, etc. So, until you apply, the credit card issuer will not be able to access your credit history.
In case the issuer thinks you are not creditworthy, your application may get rejected. And, a credit card rejection might also bring your credit score down.
Related Reads: The Difference Between a Debit Card and a Credit Card
Be aware of red flags
The mail sent to you had been designed and strategized to gain your attention. So, as a smart user, you must watch out for some red flags—
● Lifetime free premium credit cards
● Low-interest credit cards
● Free Add-On cards
● Expensive joining gifts
How to apply for pre-approved credit cards?
After reading the terms & conditions, you would need to submit documents as mentioned by the issuer. The documents generally are:
● Proof of Identity
● Proof of Residence
● Income Proof
● Copy of PAN
Once the issuer gets your application, they will look at your credit score, income and repayment criteria to make the final decision.
So, the final call is yours. You can respond to a request for pre-approved credit cards, or you can apply via the normal route. In both cases, your application will be treated like any other normal application. The issuer will make a hard inquiry on your credit score and report to check your creditworthiness. Ideally, it is suggested to apply for a credit card when you are really in need or you feel you are responsible enough to pay credit card dues on time.
You can avail your free annual CRIF credit report to check if your score is good enough for approval.
Are you confused between a debit and a credit card? Although they look identical, their uses and features like reward points, EMI option and impact on credit score are distinctly different. Read on to know more about these differences.
A debit card is directly linked to your savings account and can be used to make purchases. As long as there are funds in your bank account, you can use the card. The different types of debit cards are:
● Standard Debit Card: The money is directly withdrawn from your bank account.
● Prepaid Debit Card: It can be used to make purchases up to the amount pre-loaded on the card. It allows you to withdraw money without access to a bank account.
● Electronic Benefits Transfer (EBT): This card is issued by federal & state agencies to allow specific users to use some benefits to make purchases. Common benefits provided are food stamps and cash benefits.
Credit cards are issued by financial institutions, typically a bank. The credit card holder is assigned a pre-determined credit limit to use money as a short-term loan by the credit card issuing company. When you apply for a credit card, you agree to pay the money back on a certain date according to the institution’s terms. There are four major types of credit cards:
● Standard Card: This a simple type of credit card offered by the bank.
● Secured Credit Card: It requires an initial security deposit to be placed on the card. The deposit you pay here is equal to the transaction limit of the card.
● Reward Card: It offers travel points, cash back, and other benefits.
● Charge Card: This card doesn’t have a preset spending limit, but the complete balance amount must be paid at the end of each month.
Major Differences Between Credit & Debit Cards:
The only similarities between credit and debit cards are they are almost identical in appearance. Both have 16-digit card numbers, an expiration date, and CVV codes. But, the objective and usage of both cards are different. Let’s look at the differences between them.
1) Impact on Credit Score: A credit card affects your credit score in 3 ways
–Builds your credit history
–Displays your repayment intent
–Shows your credit behaviour
Building a credit history is a hidden benefit of using a credit card. Credit history is an important factor in your credit report and score. The simple logic is if you don’t have a history, how can you have a score? There are simply no parameters to judge you. Debit cards, since they rely on the amount actually in your account, do not count towards credit. So, using a credit card is a good way to build your credit history provided it is managed well. A well-managed credit card has a good payment history. This means that you don’t default on any of the monthly payments.
And, last but not least is your credit behaviour. Do you constantly maximise your credit limit? Is your credit utilisation ratio very high? This ratio is the percentage of actual credit usage out of your total limit. E.g, if your limit is Rs.1 lakh and you regularly use Rs. 80 k, your credit utilisation ratio is 80%. This shows a “credit hungry behaviour”, also viewed negatively.Such factors lower your credit score, create a negative impression in the eyes of lenders, and subsequently, such consumers will struggle to get a loan approval.
Related read— How To Find Your CRIF Credit Score – An Infographic
2) EMI Option: In debit cards, there is no concept of EMI because the entire amount is directly debited from your savings account. However, a few e-commerce sites and some banks are offering a debit EMI option, wherein you need to maintain a fixed/recurring deposit to avail this facility. When you purchase, your money is first debited from your bank account and subsequently reversed in two working days. This means you need to maintain the necessary balance at the time of the initial purchase. The debit card EMI starts after 30 days from the date of reversal.
Credit cards give you the facility to convert your purchases into EMI. But, you have to pay interest every month on the outstanding amount until your EMI is fully paid. You might also have to pay service tax and other additional charges. You may have an idea of using multiple credit cards to fund different purchases and increasing your total credit limit. But, before you hit apply, wait! Multiple credit cards, with high utilisation, will negatively affect your credit score. When you apply for a loan, banks check your credit history of each credit card you use.
3) Protection on Purchase: Both debit and credit cards have a PIN; hence, they are secured. A majority of credit cards have a liability protection feature, which makes them safe & secure from any unrecognized transactions or frauds. In addition, many banks provide a charge back feature, wherein an unauthorised transaction on a credit card is paid back to the cardholder. These features are not offered on debit cards. If you want such security, you can apply for the Card Protection Plan (CPP) and secure your debit card from any fraud or misuse. Unlike debit cards, credit cards offer cashback and rewards such as fuel points, air miles, and free gifts.
Conclusion: Credit cards can come with huge financial benefits if used wisely. They build your credit score and ease loan approval to fulfil your financial goals. But, before you swipe your next credit card, check your CRIF credit score here and monitor it regularly.
Every transaction on your credit card affects your credit score. One of the factors that affects it is not paying your credit card dues on time. But, did you know applying for a new card or closing an old account can also negatively affect your score? Read on to understand how such common credit card habits can hurt your score:
● Use Credit Card to Create Credit History:
You can use credit cards not only to make purchases but also to establish a good credit history. If you have never availed a loan or used a credit card, you won’t have a credit score. Your credit report will give a score of -1 or NH (no hit). This means that lenders cannot determine your credit behaviour. Using a credit card is one of the simplest ways to start your credit history.The caveat is to build a good history. Pay off all your credit card dues on time every month to establish yourself as a responsible borrower.
● Delay in Credit Card Payments:
Your payment history is the most influential factor of your credit report. It makes up 35% of your credit score. If you are in the habit of missing out on paying your card dues, then you may be damaging your score. Moreover, any delays in payment are reported to credit bureaus like CRIF. To avoid the repercussions of late payments, and boost your credit score, get into the habit of paying your credit card dues fully every month.
Related Read: An Infographic on Ways To Maintain Your Credit Score
● Credit Utilization Ratio:
It is an indicator of the amount you have used out of the credit limit available to you. If you haven’t used your credit card and there is no balance, your credit utilization would be counted as zero. If you are applying for a loan, you need to carry some balance on your card. As a rule of thumb, you should maintain a credit utilization ratio of 30-40%. Anything higher than this may cause a dip in your credit score as lenders can attribute this as credit hungry behaviour. If you think you can efficiently manage your credit card dues, you can ask your bank to give you a higher credit limit on your existing card. Or, you can even apply for a new card with a higher limit. But, ensure that you don’t exceed your credit limit even if you are tempted to spend more.
● Applying for a New Credit Card:
Every time you apply for a new card, a hard enquiry is initiated on your credit report. This temporarily drops your credit score. Your score will recover after a few regular payments. Applying for multiple credit lines like credit cards or loans at the same time can hamper your score. Hence it’s always advisable to keep your credit card applications to a minimum. Apply only when it is really required. Whenever you apply for a credit card, draw a comparison between 2-3 cards. Based on your current credit score, pick the one that suits you the best. For example, if you shop a lot, then look for a card that offers good cashback. Similarly, if you travel constantly, a credit card that offers good air miles can be your choice.
● Closing a Credit Card Account or Discontinuing a Credit Card:
As your scores get affected while opening a new account, similarly, discontinuing an old credit card may hit your credit score badly. This is because credit history makes up to 15% of your total score. If you close an account that has been there for a long time, you are erasing all your credit life. Credit history is an important factor in your credit score.
Additionally, as you no longer have access to the credit limit of your card you closed, your credit utilization ratio will also drastically drop.So, make a wise decision before closing any old credit card. Instead of closing it, you may simply lower the usage of the card or keep it safe. This will not hamper your score. If you have multiple cards, you can close the most recent one.
To conclude, your credit card and other loans have a great impact on your credit score. Make sure you stick to the credit limit of up to 30-40% and adopt the aforementioned credit habits. If you haven’t checked your scores lately, make sure you review your credit report with CRIF.
Credit and debit cards may look similar, but their features and uses are quite different? Let’s understand some differences between them and how they affect your credit score.