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Credit cards are powerful tools that play a direct role in shaping your credit score. Used wisely, a credit card can help you build a solid financial foundation. However, poor management may harm your score and limit future access to loans or lower interest rates.
A credit score is a three-digit number that reflects your creditworthiness — or how likely you are to repay borrowed money. In India, scores like bureaus from TransUnion CIBIL or Experian typically range from 300 to 900, with a score above 750 considered good or great. Lenders use this score to decide whether to approve you for loans, credit cards, or other financial products.
Your credit score is calculated based on several factors, each with its own weightage:
Payment history: 35%
Credit utilisation/Amount owed: 30%
Length of credit history: 15%
New credit/inquiries: 10%
Credit mix (types of credit): 10%
Each of these areas is assessed by credit bureaus using information from your credit report. Making timely payments, keeping balances low, and using a mix of credit accounts can all raise your score. Mistakes like high card balances or late payments can lower it.
Determines your eligibility for credit cards, loans, and mortgages.
Affects the interest rate you are offered—higher scores usually fetch you better rates.
Employers and landlords may check your score before hiring or renting.
Impacts your ability to increase credit limits or access premium credit cards.
Credit cards can raise or lower your score depending on how you manage them. Here are some key related factors:
Payment History: Making timely repayments on your card builds a positive history. Conversely, late or missed payments hurt your credit score.
Credit Utilisation Ratio: Using a large part of your available credit lowers your score, while keeping usage under 30% can boost it.
Number of Accounts: Too many credit cards, especially opened in a short period, can lower your score. Multiple cards also mean more repayments to manage.
Length of Credit History: The average age of your accounts affects your score. Older accounts with a good credit standing and repayment record are beneficial.
Type of Credit Used: Having both revolving credit (cards) and instalment loans improves your credit mix, helping your score.
Payment history is the most influential factor, making up 35% of your score. Its effects are as follows:
Timely Payments: Consistently paying your bills on or before the due date signals responsible borrowing, directly supporting a higher score.
Late Payments: Even one late payment, especially more than 30 days overdue, can damage your score notably and remain on your record for years.
Defaults and Collections: Defaulting on repayments, or accounts being sent to collections, severely hurts your credit score and indicates higher risk to lenders.
Partial Payments: Paying less than the minimum due keeps your account current but still accrues interest; repeated partial payments may suggest financial stress.
Frequency of Missed Payments: Multiple missed or late payments over time signal worsening risk, compounding the negative impact on your rating.
Credit utilisation is the portion of your available credit limit you use. For example, if your card limit is ₹1 Lakh and your balance is ₹40,000, your utilisation ratio is 40%.
Lenders and credit bureaus use this ratio as a key metric of your managing habits. A high utilisation ratio suggests dependence on borrowed funds, raising red flags for lenders.
Below 30% Utilisation: Keeps your score healthy. Lenders see you as responsible.
Above 50-60% Utilisation: Signals overreliance on credit and can quickly drag down your score, even if you pay on time.
Maxing Out Cards: Using 90% or more of your limit is considered risky and has a powerful negative impact on the score, making it difficult to obtain fresh credit.
Opening and closing card accounts each affect your score in different ways:
Opening a New Credit Card: Applying for a new card can lower your score slightly, as it creates a hard inquiry on your report. However, adding a card also increases your total available credit, which can improve your utilisation ratio if you don’t increase spending.
Closing an Old Credit Card: Shutting down a long-held account can shorten your average credit history and reduce total available credit, raising your utilisation ratio. Both of these can lower your score, so think twice before cancelling your oldest cards, especially those in good standing.
Opening Too Many Cards Quickly: Multiple new accounts in a short time period signal potential financial trouble, leading to more hard inquiries and a possible decline in your score.
Inactive Account Closure by Lender: If you don’t use a card for a long time, banks may close it. The resulting drop in available credit can also subtly impact your score.
Closing New/Unused Cards in Short Period: If closed early, new cards have a minimal positive history and can reduce your total available limit, harming your utilisation ratio and score.
Card usage can start influencing your score quickly, but the extent of the impact depends on your activity.
Immediate Effect: Opening a credit card (application or approval) triggers a hard inquiry and appears almost immediately in reports, usually lowering your score by a few points.
Monthly Reporting: Your account activity, payments, and balances are typically reported to credit bureaus every statement cycle (twice a month). Changes—such as a major repayment or a spike in usage—show up soon after.
Building History: Consistent, responsible usage (timely payments, low balances) will gradually enhance your credit score over 6–12 months. Negative marks like defaults may last for up to seven years.
Example: Suppose Priya, a new cardholder, pays off her ₹5,000 credit card bill fully and keeps her usage below 30%. Within 1 year, her CIBIL score can rise from 700 to 750 due to her responsible approach.
Improving your score with a credit card involves these simple but effective habits:
Always Pay Bills on Time: Timely payments have the greatest impact on your credit score. Use reminders or auto-debit to eliminate missed deadlines.
Keep Utilisation Low: Aim to utilise under 30% of your card’s credit limit each month, or spread spending across multiple cards to manage the ratio.
Keep Cards Open, Especially Old Ones: Retaining old cards with good histories helps your average account age and maximises available credit.
Limit Applications for New Cards: Apply for new credit only when needed. Multiple applications in a short time trigger hard enquiries and may lower your score.
Review Statements and Reports Regularly: Check your bills for errors or suspicious transactions and dispute inaccuracies with bureaus promptly. Regular monitoring helps spot issues before they escalate.
Steer clear of these frequent pitfalls that can harm your credit score:
Maxing Out Credit Limits: High utilisation signals risk and can quickly bring your score down. Avoid letting outstanding balances climb near your credit limit.
Missing or Delaying Payments: Even a single missed payment can have lasting negative effects. Make at least the minimum payment every month to avoid a drop in your score.
Applying for Too Many Cards Quickly: Each application means a hard enquiry. Several in a short period may look like credit-hungry behaviour to lenders.
Closing Good Standing/Old Accounts: Shutting down seasoned cards shortens your credit history and drastically reduces available credit, hurting both history and utilisation ratio.
Using Only One Type of Credit: Relying only on credit cards (without instalment loans) results in a narrow credit mix, which may cap your score’s improvement potential.
Credit cards are a double-edged sword when it comes to your credit score. Sensible use—timely payments, low balances, and careful account management—can help build and maintain an excellent score. Poor habits, however, may quickly undo years of careful financial planning.
Getting a credit card may lower your score by a small amount initially due to a hard enquiry and a drop in average account age. Over time, responsible use may enhance your credit score by building good payment history and improving your utilisation ratio.
Credit cards influence your score through factors like payment history, credit utilisation, account age, and credit mix. Using your card responsibly and making payments on time can boost your score, while missed payments or high balances can reduce it.
EMI repayments are factored into your payment history. Missing or delaying an EMI payment will hurt your score, just like any other type of missed payment. Regular EMI payments, on the other hand, can support a better score.
Using 90% of your available credit is seen as risky. This high utilisation ratio can bring down your score even if you pay on time, and may make lenders hesitant to approve new credit cards or loans.
Cancelling a credit card can negatively affect your score by reducing your available credit and possibly shortening your credit history. Consider keeping old cards open unless there’s a strong reason to close them.
Yes, using 80% of your credit limit is typically considered high and can lower your credit score. Try to keep your utilisation below 30% for the best score outcomes.
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Posted on 16 May
Roshani Ballal
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