A good credit score helps to achieve financial stability in today’s time. If you did not know, a credit score is a number that shows banks or lenders how creditworthy you are as a borrower.
Your credit score leans on your credit history, which includes how regularly you pay your credit bills, and how many credit options you have, among other factors. The chances of getting a credit card largely depend on how good your credit history is.
And if you are a novice in the world of credit, read on to learn some tips that can help you as you begin your credit journey.
Factors that influence your credit card history
Several factors come into play regarding the good maintenance of your credit history. Take a look at some of them:
Did you know your payment history contributes as much as 35% to your credit score? So, if you want to maintain a good credit score over time, make sure you pay all your bills, including credit cards, loan EMIs, etc. on time.
Credit history length
The duration of your credit accounts should be significant to have a good credit score. Additionally, it is advised to close all your inactive credit accounts. These two actions impact your credit history.
Try to diversify your credit usage with different products, such as personal loans, home loans, credit cards, etc., instead of one credit card. Using different credit options responsibly shows you are creditworthy.
Number of hard inquiries
Lenders do check your credit profile before accepting your credit application. This process is known as a hard inquiry.
Tips for establishing good credit
Building a credit history can be daunting if you are new to the world of credit. It makes one wonder: how to establish credit if you do not have any credit history? Read on to learn some of the credit-building methods.
Get a credit card
A credit card is an effortless and popular way to build your credit score. You can opt for two types of credit cards: secured and unsecured. An unsecured credit card is given to applicants with good creditworthiness and score. On the other hand, a secured credit card can be applied by someone who is unemployed and has some collateral, such as a fixed deposit, against which they can avail of a credit card.
Become an authorized user
If you do not have any credit experience yet, you can still earn your credit score by becoming an authorized user of a loved one’s credit card. For instance, if your partner or any relative uses a credit card, you can request them to authorize you as the card’s user. But make sure you are utilizing the financial product carefully, as its usage impacts your credit score.
Manage your credit card well
It makes sense to have one to three credit cards, at maximum, as long as you can make your payments regularly. One should only apply for three credit cards at a time as you could come across as a credit-dependent person. Also, do not opt for credit cards at different banks; instead, show your lender you can manage your existing credit effectively. Eventually, you can ask your bank to increase your credit limit. Keep your balance in check and pay your bills regularly and in full. Lastly, many online tools exist to get a free credit score check.
Using your credit card
Building a good credit history takes time, so make sure you use your credit card regularly and repay your credit card monthly bills regularly. Whether you are a regular user or looking to build your credit history, using your credit card at least once a month is recommended to retain your credit score.
Credit utilization ratio (CUR)
Credit card lenders allow a certain amount of credit lines that borrowers can use. Known as credit limit, it is one of the critical factors that determine your credit score. It comes in handy when credit bureaus, like CIBIL, consider the credit utilization ratio. This ratio measures your credit card debt along with the limit allocated to your credit card.
Keeping your CUR within 30%-40% of your total credit limit is imperative. Although a CUR of 60%-70% will not hamper your credit score, maxing out your credit card limit frequently or having a CUR of 90%-100% makes you look like a credit-hungry person.
The latter also impacts your credit score adversely.
Opt for an unsecured credit card
Credit bureaus require at least six months of the consistent credit card used to generate your credit report. A smart strategy here would be to build your credit history for at least a year to get a secured credit card. This will show that you can manage your finances well, making it easier for you to apply for an unsecured credit card. As an unsecured credit card user, you get more benefits, such as credit limits and perks, without any collateral obligation.
Building an impressive credit score needs time. It all boils down to how well you manage your credit over time. Just like Rome was not built in one day, a good credit score may take six months to a year to build. So, use your credit card regularly and pay your bills on time.