How Can Credit Card Users Maintain a Healthy Credit Score?

A good credit score can open new doors for you to avail credit easily and on better terms. The contemporary financial institutions that are in the business of lending money always ask for the applicant’s credit score before processing their application. A good credit score can help to establish trust with the lender. From the lender’s perspective, it is safer to lend credit to borrower’s who have a good repayment track record. At the end of the day, most financial institutions are in the marketing to lend money and earn some profit out of their investments. If they fail to receive the principal and interest amount from the borrower, it will be a losing proposition. Let’s delve deeper into what a credit score is and how it helps to determine a user’s credit card limit

What is a credit score?

A credit score can be defined as a 3-digit numerical metric that is used to measure an individual’s creditworthiness based on their track record. It is issued by the credit bureaus of a nation after proper evaluation of credit records. It helps lenders to filter good, bad and average borrowers. The credit score calculation takes multiple factors into account such as total level of debt, number of open accounts, repayment history, etc. All these factors are assessed before calculating the credit score. 

The credit scores can vary in the range of 350 to 900. A higher credit score is linked to the better creditworthiness of the borrower. A credit score between 700 to 750 is considered as good, a score over 750 and up to 800 is considered as very good. Anything higher than 800 is considered excellent by lending institutions. A good credit score will help you get loans at a lower interest rate. It can also increase other elements like the total loan amount, duration of credit, credit card limit, etc. In short, borrowers can get favourable terms and conditions on their loan amount.

Tips to maintain a healthy credit score

Applying for a loan or credit card online has made it easier for people to access credit. It is important to understand how a loan or a credit card can impact your credit score. Both these financial tools can either improve or decrease your credit score, depending on how you use them. Timely repayment of your loan amount and credit card bills will positively add to your credit score. However, failing to do so can lower your credit score drastically. Here are some effective tips for loan applicants or credit card users to maintain a healthy credit score.   

  • Never default on your monthly repayment obligations 

Always make sure that you are paying your monthly bills on time, never default on your repayment obligations. You should not skip your repayment cycles for credit cards since it will attract higher interest fees and late repayment penalties. This can add to your financial burden and will ultimately create a debt trap. 

  • Always pay at least your minimum due amount

If you are a credit card user, you must be familiar with the concept of minimum due amount and grace period. The minimum due amount is the amount borrowed on the credit card that you must repay within the cycle to avoid any late payment charges on your amount. You are required to pay this amount before the due date. Usually, the minimum due amount is around 5% of the total amount outstanding. It is recommended to keep up with your credit card statements so that you don’t miss this. 

  • Refrain from overusing your credit card

Overusing your credit card also leads to a lower credit score. Most credit card companies have a spending limit set for their users which differs depending on the credit profile of the borrower. It can also vary based on the credit card company. A utilization ratio of 30% or lower is considered good for a healthy credit score. It is recommended that you don’t exceed your borrowing over 30% to 40% if you want to improve your credit score.

  • Don’t withdraw cash using your credit cards

Most lending institutions frown upon users withdrawing cash using their credit cards. Using a credit card to withdraw cash is also not recommended as it involves a huge fee. Always make it a habit to refrain from withdrawing cash using your credit cards.