Your Credit Score demonstrates how you have dealt with credit in the past. Whether you are applying for a loan or a credit card, every lender will evaluate your Credit Score before approving it. Do you know that you will often see monthly changes to your Credit Score if you are frequently using credit cards? 

Here we will discuss how your credit card usage influences your Credit or CIBIL Score. 

Credit Utilization Ratio Matters

Your credit utilization ratio is how much credit you have used versus the available credit limit on your credit card. All credit bureaus consider this ratio while assessing an individual’s credit profile. Banks and other financial institutions have standardized credit utilization ratio ranges for your reference. The following list will give you a better idea about it.

0-9% : Excellent

10%-29%: Good

30%- 49%: Fair

50%-74%: Poor

75%: Very poor

The credit utilization ratios indicated above clearly state that utilizing 75% of your available credit limit affects your credit score. When you reach your credit limit frequently, it indicates that your income does not support your spending habits, thus impacting your creditworthiness. Hence, it is important to be mindful while using credit for daily expenses. Experts recommend that keeping your utilization ratio to 30% effectively ensures a healthy credit score while helping you fulfil your financial requirements.

Payment History is Important

An individual’s payment history is assessed by banks during a loan application process. If there are consistent delays in credit card bill payments or loan EMI payments, it will hurt your credit score. One can access the details of all overdue and pending payments in a credit report. This is why it is essential to keep checking your credit report regularly.

Your Credit Report Can Be Subjected to Hard Inquiries 

Banks or credit providers will inquire about your credit report to analyse whether you are a responsible borrower or not. These inquiries are of two types – hard inquiries and soft inquiries. Soft inquiries do not have much effect on your Credit Score. Whereas hard inquiries may influence your Credit Score negatively. When you apply for a credit card, credit providers could ask for a hard inquiry and this will lower your CIBIL Score by a few points (usually 5-10). It’s important to note that while the hard inquiry will remain on your credit report for two years, it will impact your CIBIL Score only for a few months. 

The Age of Your Credit Card Matters

The longer you keep your credit account open, the better it is for your CIBIL Score. This is especially true when you have kept the account active for a long time and paid off all the debts on time. That being said, opting for a new credit card may bring down the average age of your credit accounts. At the same time, in comparison to opening an account, closing one can have an even bigger impact on the credit length. The older credit cards tend to have a long track record of credit payments and this will help in creating a solid credit history, enabling you to boost your Credit Score the longer you have them active. 

Using Up Too Much Credit Will Influence Your Credit Score 

When a creditor offers you a credit card, they will put a limit on the card. The credit card limit will depend on various factors such as your ability to repay and the lending institution you have applied to. While you are free to use the entire credit limit, you mustn’t do it as this will increase the credit utilisation ratio. This ratio will influence your Credit Score. So, it is recommended that you utilise just 30% of the allowed credit limit. Using a large amount of your available credit can indicate a heavy reliance on borrowed funds, which is often viewed unfavorably by credit providers.

Paying Only the Minimum Amount Will Hurt Your Credit Score 

Credit providers assess your credit behavior by evaluating your monthly income and how well you have managed your previous credit. It gives them an understanding of your creditworthiness. The ideal way to maintain a good credit record is to pay the bills in full as it has a positive impact on Credit Score. This way, you will not have to pay the applicable interest.

Having Too Many Credit Cards Can be a Problem 

Managing several credit cards at the same time can burden your creditworthiness. When there are multiple hard inquiries on your credit report, it will reflect as credit-hungry behavior. Which is why it is recommended that you use just a few credit cards and ensure that the bills are paid on time, without any default. 

Monitor your expenses and run a CIBIL Score check every once in a while to learn about your financial standing. To learn more about how your credit card usage could be impacting your Credit Score, get in touch with Team Oolka.

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