How to Build Credit with a Credit Card?

A Credit Card is a very handy financial product since it essentially gives you access to a short-term loan from a bank - you use the Card to buy now and pay later. What’s more, responsible use of a Credit Card can also help build your credit score. However, many people fall into a debt trap owing to over-usage of the Card or delays in making Credit Card bill payments. This can severely impact their credit score. In this blog post, let’s see how you can use a Credit Card to create and improve your credit score.

What is a credit score?

A credit score is a three-digit number that depicts a borrower's creditworthiness. It is usually between 300-900. The higher the credit score, the easier it is to get a loan from a bank. A good credit score indicates that you are a responsible borrower with a good repayment history. You can check your credit score online.

What is the relationship between a credit score and a Credit Card?

Most users avail a Credit Card to increase their financial capability, for it allows them to make purchases that are beyond their current purchase limit. However, not many people know that a Credit Card can also help you build your credit score. Your credit utilisation and Credit Card bill payment habits are reported to credit bureaus, basis which they create your credit report and assign you a credit score. So, if you do not have credit history and hence no credit score, then using a Credit Card can be a smart way to start building it.

Timely repayments of your Credit Card dues build trust with your bank and gradually improve your credit score. They are also included in your credit history, strengthening your overall credit profile. To make the most of this, always pay your Credit Card bills on time and in full– do not succumb to the temptation of paying just the minimum amount due.

Taking a loan on your Credit Card can also help improve your credit score if you manage the repayments wisely. The EMIs of this loan are added to your monthly Credit Card bill. When you take a loan on your Credit Card and repay it on time, it shows the bank that you handle your finances responsibly.

Another way of improving your credit score is to avoid using your full credit limit all the time. Keep your credit utilisation ratio balanced.

Here are the steps you can take to build a healthy credit score by using a Credit Card:

• Pay your Credit Card bill on time:The most important way to build a healthy credit score is by paying your Credit Card bills on time. Delayed payments attract interest charges and late payment fees. Additionally, it is crucial to avoid paying only the minimum due amount as the interest continues to accrue on the outstanding billing amount. You can set an automatic payment instruction in your bank account to ensure that your Credit Card bill is always paid on time.

• Use your Credit Card only when it is necessary:At times, you might be tempted to make the most of the offers, discounts or deals provided by your favourite brands. This might lead to overspending on unnecessary things, particularly if you are a Credit Card user, since a Credit Card lets you buy now and pay the bill later. So, it’s critical that you control the purchases made using your Credit Card.

• Don't max out your Credit Cards:Every Credit Card comes with a pre-defined credit limit. This limit is decided by the bank based on your income and other eligibility factors. Going overboard with your spending beyond your credit limit can majorly affect your credit score. If you want to improve your credit history, it is essential to control your expenses and stay within your assigned credit limit.

• Retain your old Credit Cards: Banks keep adding new Credit Cards to their repertoire of offerings to keep up with the evolving needs of the customers. New Credit Cards might overtake older Cards in terms of features, benefits and offers. Often, when you avail a new Credit Card, you might discard or close the older one because it might not be useful to you anymore. However, it is advisable to not close the old Credit Card, as the longer you hold a Card, the longer is your credit history and the better it is for your credit rating.

If you've never had a Credit Card or never taken a loan before, consider applying for a secured Credit Card from ICICI Bank.