Can a New Credit Card Help to Build a Good Credit Score?
March 06, 2018
A person’s credit score is one of the most important details that follows them their entire life. It’s considered when applying for a personal loan, credit card, mortgage, and even job. However, every person has to start somewhere, which is why it can be tricky when they want to create a high score but don’t have any credit history to back it up.
In situations like these, a credit card is usually suggested as a great option.
However, merely using a credit card doesn’t guarantee a good score. Instead, one must keep the following points in mind:
- Bill Payments
A credit card serves you well only as long as you are paying the bills on time. However, if you are late with the payments, or are paying minimum payments, then it could be detrimental towards your credit score.
A minimum payment is around 2% of the entire bill for a month which you can pay to avoid penalty or fine. However, the balance is transferred to the next month in the form of debt which is bad for your credit score.
- Credit Variety
A credit card can do wonders for your credit score if it improves the credit variety on the report. For instance, if you already have experience with a personal loan, home loan, etc., then when you start using a credit card, it adds a new layer to your credit profile and boosts the score.
- Utilization Ratio
One of the most important things to keep in mind when using a credit card with regard to the credit score is the credit utilization ratio. This is the ratio of the credit limit and the credit utilized.
For instance, if your credit card has a limit of Rs. 1 lakh, and you spend around Rs. 40,000 per month using the same, then your utilization ratio is 40%. Ideally, this ratio should not be more than 35%.