How Credit Cards Affect Your Credit Score

Your credit score is like a grade for how well you manage your money and debts. It's determined by things like whether you pay your bills on time, how much debt you have, how long you've been using credit, and if you've recently applied for new credit cards. Credit bureaus, like TransUnion CIBIL and Experian, gather information from lenders to calculate your score. This score helps other lenders decide if they should give you a loan and how much interest to charge.

How using credit cards can impact your credit score

Number of Credit Cards

You can have as many credit cards as you want, but most people in India typically have 2-3 cards for different needs. Having too many cards, like 6-7, might make lenders think you're really eager for credit. It's not great to rely only on one card either. It's good to have a simple card for everyday use and another for special needs.

Your Overdue Balances

Your overdue balances on credit cards significantly impact your credit score. When you only pay the minimum amount each month and carry over the remaining balance, it doesn't count as a late payment, so your credit score remains unaffected. However, if you can't even manage the minimum payment on time, it gets reported to credit bureaus. Your credit report then shows how many days your balances were unpaid past the due date, known as Days Past Due (DPD). That's why it's crucial to pay your credit card balances in full and on time whenever possible.

Closing Your Credit Card Account

Closing your credit card account can have a significant negative impact on your credit scores. This is mainly because your credit history plays a major role in determining your score. When you close an account that has been open for a long time, you're essentially removing years of credit history, which can lower your score. Additionally, your credit utilization ratio may also decrease because you no longer have access to the credit limit of the card you closed.

Transferring Balance

When you transfer a balance from one credit card to another, it's usually done to take advantage of a lower Annual Percentage Rate (APR). However, if you transfer a balance to an existing card with a lower APR, while you'll save on interest, it may negatively impact your credit utilization ratio and credit score.

Your Available Credit Limit

Your available credit limit is the maximum amount of money the bank allows you to spend on your credit card based on your financial situation. Going over this limit can result in hefty charges, so it's important to stay within your limit. Maxing out your credit cards, or spending up to the limit, isn't a good idea because it increases your credit utilization ratio, which can harm your credit score. Credit card companies also keep track of the highest balance you've ever had on your card, known as the "high balance." Even if you pay off a maxed-out balance, this high balance could still show up on your credit report.

Your credit score depends on your credit cards and any loans you have. If you have a loan but no credit card, getting one can boost your credit score. Credit cards also let you buy things and pay in installments. To keep a good credit score, pay your loan installments on time and pay the full credit card balance each month. Keep your credit card spending below 30% of your limit and be responsible with credit.

FAQs on How Credit Cards Affect Your Credit Score

Why is it important to maintain a good credit score?

Keeping a good credit score comes with several perks. Firstly, it improves your chances of getting approved for loans. Lenders prefer borrowers who handle their debts responsibly and often offer them the best deals on credit cards and loans. Additionally, having a good credit score means you may qualify for loans with lower interest rates. So, whether you're applying for a credit card, personal loan, or even a home loan in the future, having a good score can be really beneficial. Always prioritize maintaining a solid credit history.

How to maintain a good credit score?

To keep a good credit score, you must pay your bills and EMIs on time, and it's best to avoid overdue payments. Maintaining a favorable credit utilization ratio is important too. Also, try to limit the number of credit inquiries you make. Regularly check your joint, guaranteed, and co-signed accounts. A good credit score boosts your credibility with lenders, leading to better offers when you apply for credit.

Is having multiple credit cards affect your credit score?

Having multiple credit cards doesn't affect your credit score. What matters is how you use them. Whether you have two or twelve cards, not paying your bill on time can lower your score. But if you pay on time, your score goes up. More cards mean a higher total credit limit, which can be good.

How many credit cards is too many?

There isn't a specific limit on how many credit cards you can have. It's more about what works best for you. Before getting a new card, think about its benefits and how you'll use it. Look at things like the credit limit, annual fees, and perks. Keep your credit usage low and pay your bill on time. Doing this will boost your credit score.