Building credit: How to use your credit card wisely

If you hold a credit card, you must understand how empowering it is to have a financial backup for all your monthly expenses. While a credit card serves as a funding source, it also helps you build your credit score or rebuild an already degraded one. Using your credit card for building your CIBIL score requires a strategic approach and consistency in your spending and repayment habits. Let us explore how to use a credit card wisely for a better credit building and progressing smoothly towards the financial goals.  

Know your credit score

Begin by knowing your CIBIL score to get an idea of where you stand financially. A credit score is a 3-digit number between 300 to 900 that represents your creditworthiness. The higher the number the better is your creditworthiness. Having a healthy credit score lets you access numerous financial products such as personal loans, home loans, car loans and more with better deals.

There are several ways to access your CIBIL score which includes the official portal, Umang app, or third-party service providers. Once you get your score, you can adopt the proven ways mentioned below for enhancing your scores.

Tips for using a credit card to build your credit score

  1. Timely payments: Ensure prior settlement of your credit card bills by the due date. Timely payments not only save you from late fees but also foster a positive credit history which, in turn, helps you build a robust score.
  2. Mindful credit utilisation: The credit utilisation ratio is the percentage of your credit limit utilised and it plays a pivotal role in setting your credit score. Focus on maintain a ratio below 30% of your card limit to demonstrate responsible credit management and avoid potential credit pitfalls.
  3. Avoid maxing out: Despite a defined credit limit, resist the temptation to max out your card.  Conservative card usage not only prevents potential debt traps but also shows your financial responsibility to card issuers.
  4. Regularly monitor your credit report: Monitoring your credit report on a regular basis enables you to detect and rectify any discrepancies. This approach ensures that your credit history remains accurate when generating your CIBIL score.

Choosing the right credit card

While it is important to follow the above tips, it is equally important that you hold the right credit card based on your financial needs. Consider the following factors while choosing a credit card.

  1. Interest rates: Check and compare the annual percentage rate (APR) associated with credit cards. A lower APR translates to lower borrowing costs, making it a favourable choice for you.
  2. Rewards and benefits: Explore credit cards offering rewards, cashback, or travel benefits. Align these perks with your lifestyle to maximise the utility of your card. Consider whether the rewards structure complements your spending patterns and preferences.
  3. Fees and charges: Thoroughly examine the fee structure associated with a credit card. Consider annual fees, late payment fees, and foreign transaction fees. So opt for a card with transparent and reasonable fee structures.
  4. Credit limit: Know the credit limit being offered to you through the card. Ensure it aligns with your spending patterns and financial capacity. Avoid cards with limits that encourage excessive spending or fall short of your requirements.
  5. Credit card eligibility criteria: Familiarise yourself with the credit card eligibility criteria. Different cards cater to diverse demographics and financial profiles. Choose a card aligned with your credit history and financial standing to increase your chances of approval.

Focus on your spending habits and financial goals

Your credit card should be strategical managed in such a way that it suits your spending habits and financial aspirations. Categorise your expenditures and set suitable limits to prevent overindulgence. Define clear financial goals and leverage your credit card as a tool to achieve them. Whether it’s accumulating reward points for future benefits or using your card to build an emergency fund, let it align seamlessly with your financial objectives.

A credit card is not just a financial instrument; it’s a means to financial empowerment when handled wisely. Follow the principles outlined above, and you will forge a path towards a resilient credit profile and a prosperous financial future.