Does Your Credit Card Balance Have an Impact on Your Credit Score?

Owning a Credit Card has become an indispensable source of making payments, which makes monthly payments, online and offline shopping, and paying for travel, vacation, and food much easier. Not only expenditure, but Credit Cards also have several other benefits that can be enjoyed by someone who can meticulously and prudently use plastic money. Here, we will learn how Credit Card balances directly impact your credit score and how you can use them wisely!

Credit Cards and Credibility

Before you start using your Credit Cards, remember that understanding the different types of credit cards is crucial. Spending off your Credit Card is a debt that must be repaid. You enjoy interest-free usage if you pay the entire amount within the stipulated time limit. But, if you don’t pay the entire amount or default on your payments, you pay a massive interest amount along with penalties.

Similarly, the Credit Card comes with a credit limit. Using these cards more than the prescribed limit or reaching the credit limit each month showcases your dependence on them. It isn’t a good practice and can impact your credibility negatively. It’s essential to choose the right types of credit cards based on your needs and financial discipline to make the most out of them while avoiding potential pitfalls.

Credit Utilisation Ratio (CUR) and its Impact on Credit Score

Credit utilisation is the ratio of your credit balance and credit limit. If you have a credit limit of Rs 100000 and spent Rs 40000 off it, your CUR is 40%. A higher CUR displays your dependence on the credit score. It may also hamper your credit score.

If you reach your credit limit almost every month, it may hurt your credit score. On the contrary, staying within a 30% CUR and making full monthly payments shows how responsibly you deal with debt. This earns you a reward of higher credit ratings.

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How to Manage Credit Card Balances Smartly and Improve Credit Ratings

Given below are six ways in which you can wisely utilise your Credit Cards and increase your credit score:

  • Pay in Full Monthly

Paying off your Credit Card balance in full each month has two benefits. You don’t pay any interest on the amount you use, and you end up using your Credit Card optimally. This results in an increase in your credit rating and shows how wisely you can manage the use of your Credit Cards.

  • Pay on Time and Never Miss a Payment

Always be particular about the payment deadline and never miss a payment. One missed payment not only invites a late payment penalty but also scars your credit report. If you cannot pay your Credit Card in full each time, ensure you pay the minimum dues. However, remember that it can still negatively impact your credit score. If you only pay the minimum payment on your Credit Card, your balance will continue to accrue interest. You may end up with a high CUR.

  • Keep your CUR Low

Maintain your CUR below 30%. The more you use your credit limit, the higher would be your dependence on debt, which means you need more available funds to incur expenses. This can hamper your credit report.

  • Consolidate Your Debt and Go for a Balance Transfer

One of the best ways to maintain Credit Card balances, especially if you carry more than one Credit Card, is to go for a balance transfer. You can accumulate all balances of all Credit Cards and transfer them onto one. This makes you answerable and payable to only one financial institution, giving you other benefits like zero interest period.

  • Don’t Apply for too Many Credit Cards
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Applying for several Credit Cards or rejecting even a single application may harm your credit report. Instead of this, go for pre-approved Credit Card offers, and maintain only those Credit Cards which can help you meet necessary expenses.

Too many Credit Cards may lure you into incurring more lavish and unrequired expenses, thus resulting in a debt trap. It can be detrimental to your credit score health. It also influences any loan applications you may need in the future, resulting in further rejections.

  • Reduce Your Spending and Increase Your Sources of Income

Stay within your budget to avoid a poor credit rating resulting from the overuse of Credit Cards. Spend on what you need, and maintain a payable balance, that you can quickly repay from your next paycheck. 

Overspending and spending on luxurious items can adversely impact your credit health.

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Understanding that Credit Card usage is pivotal in your credit rating is essential. It is a debt granted to you based on your credibility and repayment history. If you mismanage your Credit Cards and fall into the debt trap, you may have to bear a heavy price for it. 

Therefore, be wise and maintain your Credit Card balances within the limit. A high credit rating symbolises a stable financial standing, which affects your future loan approvals or other Credit Card applications. So pay off your monthly Credit Card balances or consolidate them to have a favourable credit rating.

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