Convenience and security are two factors that have led to the exponential growth of credit cards. Buy now, pay later aids both convenience and a refuge in case of an exigency. While this is true, there is another truth about these handy plastics. Which is that credit cards can also be the biggest culprits in hurting one's credit score.
Let us first look at the factors that influence credit scores and their respective weightage.
Payment history- 35%
Amounts owed – 30%
Length of credit history – 15%
Credit Mix – 10%
New credit –10%
While each of these five factors is important, payment history and amounts owed clearly stand out in respect to affecting the credit profile. Let us now understand how credit cards impact these two factors.
Payment history
Loans are a time-bound liability and since the repayment happens through the preset automated process, chances of a bounce are only when the account is low on balance. As compared to this, credit card payment has to be initiated every month and chances of missing it out are definitely high. One needs to be careful about due dates.
Fee on credit cards has also been one reason that has led to hurting the credit score. Especially when the new card has not been used and the bill amounting to annual charge goes unpaid.
Even if there has been a miss-sell or a communication gap on the fee, charges either would be required to be paid or would need to be reversed. Customer should approach the bank and raise this issue. But not paying coupled with not communicating with the bank is only going to lead to issues.
Banks also reverse the fee if the card has been used for a certain amount in the stipulated period. There have also been instances of disputes on account of lack of understanding
Many times, not only do people miss the due dates but are also unwilling to pay the late payment and other penal charges. In quite a few of such instances, while the used amount has been paid, penal charges continue to be unpaid. This leads to attracting further charges on the limit used, right from day one. In fact, those cardholders who stop payment completely, get labeled as defaulters.
Amounts owed
Amounts owed can be defined as the sum total of money that is outstanding against all loans or cards. It is a known fact that the credit limit available on multiple cards held by an individual is much higher than what can be repaid in one go. Upon exposing oneself to higher outstanding on cards, one is left with little option but to revolve the credit. This not only makes the credit highly expensive owing to the high rate of interest charged on the outstanding, but more importantly spoils the exposure equilibrium. A continued usage of the card while revolving credit only leads to moving closer to the assigned limit.
As seen above amounts owed carry a weightage of 30%, higher usage only leads to lowering the credit score.
While credit cards are a great instrument to have in the pocket, being conscious about the use and repayment will help in maintaining a good credit profile.
USE WISELY
- Pay off all fees, including penal charges or get it reversed
- Do not miss out due dates if you have many cards
The writer is director and co-founder, Credit Sudhaar
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