On winning the Nobel Prize for economics in 1994,John Nash,the illustrious American mathematician said,I hope that getting the Nobel would improve my credit rating because I really want a credit card. Humorous as it may sound,this Nobel laureates statement emphasises the importance of credit scores,not only for getting access to credit,but more so as vital reputational collateral.
Credit cards are a form of revolving credit,which means,that by granting you a credit card the bank allows you to continuously borrow money up to a certain credit limit. Every time you buy something on credit card,that amount is subtracted from your total credit limit. And every time you pay off your balance,your credit limit goes back up.
The spending pattern and payment behavior on your credit card speaks volumes about your financial discipline and also impacts your credit history and score. Therefore,this credit facility can be used to your advantage for building a healthy credit history and subsequently a good credit score. Heres how?
Regular payments: Credit cards are unsecured form of credit. If you have been using the credit card for over a year and have been regular on payments,you have actually built a good credit history on your Credit Information Report (CIR) and ultimately a good credit score. This will provide the lender with additional confidence on your repayment capability as you have shown a disciplined track record on an unsecured form of credit.
Too many credit cards: It is also advisable not to apply for too many credit cards in a short span of time. If you have made applications for credit cards,this will reflect in the enquiry section of your CIR and will negatively impact your credit score. Simply because,this credit behavior indicates that you are credit hungry and implies that you are constantly looking for credit.
Opening and closing a credit card account: Once you have availed a credit card,it is advisable to keep it for at least 12 months before closing it. The velocity of opening and closing a credit card account reflects on your CIR and credit score and impacts the lenders assessment of your credit management capacity.
Credit utilisation: Avoid utilising or exceeding the total credit limit on your credit card. Your credit score may get negatively impacted when your balances on credit cards are very close to the high credit reflected on your credit report.
Add-on credit cards: If you have availed an add-on credit card for your spouse,children or relatives,it is important to monitor and regularly make payments on these cards as well. The responsibility of the repayment of dues on add-on credit cards rests solely on the credit card owner and impacts the owners credit score.
Through smart utilisation and regular payment of credit card bills,you can actually build and improve your credit score for availing fast and hassle free credit facilities. Also review your CIR and credit score regularly for monitoring your credit behavior and ironing out any inaccuracies that may appear on your report and hamper your credit score. Accessing your credit score and credit report has become easier as you can now authenticate and make payment on the credit bureaus website. It is critical to maintain financial discipline and prudently manage all your financial obligations for building this vital reputational collateral that will become critical for a lot many transactions in the future.
Author is Senior VP,Consumer Relations,CIBIL