5 Ways You Can Use your Credit Card to Build Good Credit

While many have mishandled credit cards and have fallen into the debt trap, a few have mastered the art of using it the right way and have built a good credit reputation in the process. Credit cards are useful and a great financial tool if used appropriately. However, it has the potential to cause you huge debt. Missing your credit card payments will attract late fees and hurt your credit score.

However, you can use your credit card to build a good credit history. Without you availing a line of credit, it is not possible to build your credit score. Your credit score is computed by credit reporting agencies in India, namely TransUnion, Equifax, and Experian based on the credit you have availed and your repayment history. How can you use your credit card to boost your credit score? To find out the five ways you can do that, read on.

Choose a card that suits your requirements: As there are thousands of credit cards easily available, it is very easy to get carried away and pick a wrong one. Make sure you have read about the features and benefits of the card before you avail one. Always compare the cost of handling the card such as joining fee and renewal fee. If you are planning on availing a co-branded credit card, ask yourself if you would use it often and if it is beneficial to you. Instead of having multiple credit cards, choose one or two cards that will be beneficial for you.

Maintain a good credit utilisation rate: Every credit card has a credit limit. The Credit limit is the maximum limit you can spend using the card. Before approving a credit card, your lender will fix the credit limit on your card based on your repayment capacity. However, you have the right to fix your credit limit.

Choose a limit that will suit your income and repayment capacity. Once you have set your credit limit, make sure you maintain a good credit utilisation rate. A credit utilisation rate is calculated by the amount of revolving credit you currently have divided by the total amount of credit available on your card. In simple words, it is the amount you owe divided by your available credit limit. A good credit rate is usually less than 30%.

Plan your credit card expenses: At the beginning of every billing cycle, plan your credit card expenses. It is very important for forecast which of your monthly expenses would be paid through your credit card. Consider all large purchases that you will have to make and before using your card, think if you should opt for a consumer loan instead. The interest rate on credit cards is high compared to consumer loans. Apart from staying financially disciplined, planning your credit card expenses will help you maintain a good credit utilisation rate.

Clear the total outstanding due amount every month: This is one of the toughest things to do for many credit cardholders. Many make paying just the minimum due amount a habit and carry forward huge credit card debt to the next billing cycle. If you are someone who does not clear the total due amount every month, be aware that you will end up paying high finance charges. Your credit card provider also reserves the rights to increase the finance charges if you have high outstanding debt on your card. Remember that credit card companies earn through the interest you pay. Therefore, avoid accumulating revolving credit on your card and clear it every month. This will boost your credit score in the longer run.

Check for offers and promotions: Almost all credit cards have offers and promotions that help cardholders save while they spend. Check if you are eligible to get a discount, earn reward points, or cashback and use it to your benefit. Using your credit card smartly will help you save money and look like a responsible borrower.

You can build your credit by being financially disciplined. Use your credit card smartly and build a positive credit history. Check your credit score regularly and take steps to boost it. This will make sure you get credit when you need it.