How does the usage of credit card affect your credit score? An explainer

Using a credit card affects your credit score in a number of ways. The factors which determine your score include the payment history, credit utilisation ratio and the length of credit history, among others.

Here explain each of them in detail:

1. The payment history: When you make payment on time, it boosts your score. When the payments are late or missed, they hurt significantly. You can set up automatic payments or reminders to never miss a due date.

2. Credit utilisation: This refers to the portion of credit that you are using.

You are supposed to keep credit utilisation below 30 per cent. For example, if your total credit limit is ₹10 lakh, you should try to keep your balance below ₹3 lakh. You should pay your balance multiple times a month or ask for a higher credit limit to keep utilisation low.

3. Length of credit history: The longer your accounts are open, the better. You can keep old credit cards open, even if you don’t use them much. Closing old accounts can lower your score.

4. Credit mix: Having a mix of credit types (credit cards, loans, etc.) can help, but not required. You should not open new accounts just for variety. You should open only if it is needed.

Some of the tips to maintain a high credit score

1. You should always pay on time: Remember that even one late payment can drop your score.

2. Keep credit utilisation below 30 per cent: High credit balances can potentially hurt your score. Importantly, you should not close old credit cards. You should keep your oldest accounts open to maintain a long credit history.

3 Limit hard inquiries: When you make too many new applications in a short time, it can lower your score.

4. Check your credit report regularly: By checking your credit report regularly, you can spot errors or fraud.

5. Use multiple payments each month: Paying before your statement date can reduce reported balances.

6. Ask for credit limit increases: This can help lower utilisation without increasing debt. 

(Note: Using a credit card carries its own set of risks)