With a simple credit card swipe, you can effortlessly purchase anything you want. This is the ul–timate convenience of owning a credit card. But did you know carelessly using your credit card can seriously affect your credit score?
The credit score is an important metric that determines your creditworthiness and predicts your credit behaviour, such as how likely you are to repay your loans on time. Being in a good credit score range opens doors to favourable loan terms and interest rates, while a poor one can lead to higher interest rates and even loan rejection. A good credit score range is considered to be between 700-900.
Thus, to keep your credit score in tip-top shape, here are five common credit card mistakes you must avoid.
Maintaining a High Credit Utilisation Ratio
How you spend your money can have an impact on your credit score—using most or all of your available credit limit results in a high credit utilisation ratio. The credit utilisation ratio is the percentage of your available credit that you are using. It is calculated by dividing your total outstanding balance by your total credit limit.
For instance, let’s say you have a credit card with a ₹50,000 limit, and your outstanding balance is ₹20,000. Then your credit utilisation ratio would be 40%. A higher credit utilisation ratio can adversely affect your credit score.
Thus it is widely recommended to keep the credit utilisation ratio under 30% to avoid a negative impact on your credit score and stay in a good credit score range. But if you are on the verge of exceeding your credit limit, try to pay in cash for your next few expenditures.
Applying for Multiple Credit Cards
Whenever you decide to apply for a new credit card, your lender makes a hard inquiry about your credit score. A single hard inquiry won’t impact your credit score, but multiple inquiries in a short span of time can lead to a more significant impact. This is because numerous inquiries indicate financial instability for lenders, such as inadequacy of cash or heavy debt.
Whether the lender approves or rejects your credit card application, your credit score will suffer. Therefore, you must avoid applying for multiple credit cards frequently. However, if you do desire a new credit card, apply after at least six months of taking the previous card.
This ensures that even if a hard inquiry lowers your credit score, it will have time to recover before you apply for another card. In addition, it will help you stay in a good credit score range.
Paying Only the Minimum Balance
Credit card issuers always let you choose to pay the minimum balance and the entire billed amount to date. However, if you have been in the habit of paying only the minimum amount, it’s time to make a change.
While paying just the minimum amount may seem convenient and affordable, it can lead you into a debt cycle. This is because you’ll end up paying interest charges on top of the accumulated interest, pushing you out of the good credit score range.
Thus, limiting your credit card spending to what you can comfortably repay is better. Doing so will prevent additional interest charges and penalties for paying only the minimum amount due.
Closing your Credit Card
There may be times when you are overwhelmed with managing multiple cards and decides to cancel them. However, cancelling your credit card is not the best thing you can do with it.
The average length of time you have had credits is one of the components of your credit score. So, when you close the credit card, it affects the average length of your credit history. As a result, it negatively impacts your position in the good credit score range. This is why it’s recommended not to close your credit card, especially the oldest one.
However, in certain cases, like where you are charged annual fees on your credit card, it’s best to close it.
Not Maintaining an Emergency Fund
Credit cards provide convenience, allowing you to make purchases easily with a simple swipe, an online OTP entry, or a quick scan. However, this convenience can sometimes lead to overspending.
The repercussions of overspending on credit cards become apparent when the time comes to settle the outstanding balance. Particularly in the face of unforeseen medical emergencies or accumulating expenses, individuals grapple with a mounting credit card balance. This can lead to a growing credit card balance, resulting in a higher utilisation ratio and ultimately lowering their credit score.
Therefore another way to stay in a good credit score range is to maintain a separate emergency fund. Doing so allows you to use your credit card for unexpected expenses still while paying your bills on time and in full.
A bonus tip: One more mistake you must avoid to stay in a good credit score range is frequently withdrawing cash using your credit card. Now withdrawing money using credit may not directly impact your credit score, but it does have an indirect impact. How?
When you use a credit card to withdraw money, the interest rates and additional fees and charges levied on it are usually high, which may make it difficult for you to keep up with the monthly payment. So when you fail to pay even the monthly due, it adversely affects your credit score.
Therefore, unless and until you are in urgent need of funds, refrain from withdrawing cash using a credit card.
Wrapping Up
Responsible credit card use can lead to financial freedom and a more secure future, so make informed decisions and exercise caution when it comes to your credit.
By avoiding these credit card mistakes, you can stay in a good credit score range and avoid paying outrageous interest rates and hidden fees. Plus, a good credit score makes you eligible for the best loan terms and interest rates.
To upgrade your financial journey, get a credit card that perfectly suits your needs, like Tata Capital’s credit card. With our credit cards, you can enjoy discounts or cashback on departmental and grocery shopping, airport lounge access, fuel charges waiver, and much more.
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30 May 2023
6 mins read
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