Have you ever asked your parents for their opinion before getting a new credit card? Or anyone with the experience of handling a credit card? They would’ve surely advised you to take this step wisely, simply because maintaining extra credit is more of a responsibility than a luxury. You have to keep your monthly expenses in mind and make charges on your credit card according to your ability to pay it back.
Right from the step you take you to apply for a credit card to start swiping it, a credit card can affect your credit score. Since a credit score basically indicates the likelihood of you paying back your loans on time. Every month your credit card issuer reports your activity which influences your credit score to the consumer credit bureaus like CRIF.
Credit cards are beneficial for building a credit score, which is why many suggest that one should have a credit card even if they choose not to use it. If you have a credit score based on your loans but don’t have a credit card, then your credit score can get affected.
In addition to affecting your credit score, they also help you in emergencies and in times of unstable financial scenarios. But they can land you in deeper trouble if they are not used wisely. When you are in a financial crunch and planning to use your credit card in those times, it is very important to put a plan in place and charge cautiously.
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Credit Limit and Credit Utilisation Ratio
Most credit cards come with a preset credit limit which means that there is no option to increase or decrease the limit as we go. But some cards automatically adjust to your spending limit and increase the available credit limits on your credit card. So, in case you are using a credit card amidst financial crunch, keep a close eye on your credit limit.
Your credit utilisation ratio plays an important role when it comes to using up your credit card limit. It is advisable to maintain a credit utilisation ratio of up to 30%-40%. But if you opt to use your credit card in times of financial crisis, then you would most probably use up your entire credit limit which will build your profile as a risky borrower. Emerging as a risky borrower can affect your creditworthiness and as a result, your credit score.
Credit Card Myths Busted
- Close all credit cards if you are not using them: Closing a credit card may not go well on your credit score. It reduces your credit limits and thereby, increasing your credit utilisation ratio. This could portray you as a credit hungry borrower. So keep your credit cards active if there are no maintenance charges.
- Playing your minimum credit card due doesn’t affect your credit score: It is always advisable to pay your credit card dues in full. Paying the minimum amount due repeatedly could hurt your credit score and increase the debt on your account. The interest rates are charged each month you only pay the minimum amount due.
Credit Card Mistakes to Avoid Amidst Financial Uncertainty
- Opting for the moratorium: The moratorium was offered to people who might want to put their credit card due clearances and loan EMIs on hold in lieu of the impending pandemic. Even though this is a helpful move by the government, it could be a means for more tension for the person who opted for it. The moratorium offered a pause on payments but the interest rates keep piling up and so do the EMIs.
- Ignoring credit card dues: A financial turmoil often puts a barrier on additional credit card transactions but it doesn’t mean that you can put your outstanding dues on hold. If you have any maintenance fees or subscription plans that you pay for using your credit card, then clear them before the due date without ignoring it.
- Prioritise your expenses: If you are dealing with financial instabilities and crunch then avoid making spends which can be kept on the back-burner for now. In fact, it is better to make a plan for every spend you want to make and stick to it. Any unplanned expenses should be avoided in such a situation.
In each of these situations, it is important to make sure that your credit score doesn’t get affected. You can safeguard your personal credit score if you plan well and take the necessary steps in advance. Check your free credit score so that you can put a plan in place.