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Can a Credit Card Improve Your Credit Score?

Credit cards have earned a reputation of leading more people down the road to ruin than the devil himself. While procuring a credit card nowadays can be a piece of cake - as long as you have the right documentation - making them work to your advantage is a far more daunting task. Not only do they have the power to bury you under an avalanche of perennial debt, but they also possess the power to work wonders for your financial health by potentially improving your credit report and significantly impacting your CIBIL score in a positive manner.

Banks and financial institutions today rely almost solely on CIBIL scores to gauge whether or not to issue loans or credit cards to customers. Applicants with bad credit history or even no credit history at all, stand little chance of acquiring credit from a lender.

For those who already own one or more credit cards, there are numerous ways to use them to strengthen your CIBIL score.

Make purchases using cash instead of credit

Most people tend to make large purchases using credit cards in the hopes of paying off the amount over a period of time. While this might seem like a feasible option, it can have a detrimental effect on your CIBIL score if repayments are not made in a timely fashion.

For example, Karan, a software engineer, recently acquired a credit card from his local bank. While his financial position was fairly stable, with no debt attached to his name, he decided to use his credit card to purchase airline tickets worth Rs 70,000 for a holiday to Scandinavia. However, his trip incurred expenses that went beyond his planned budget and ate heavily into his savings, forcing him to use his credit card once more to finance parts of his holiday. He eventually returned home saddled with a credit card debt of over a lakh and very little left to pay it off. Things turned sour quickly and he found he wasn’t earning enough to cover his monthly expenses as well as the repayments towards the card. Over time, he approached various banks seeking a loan, but was rejected due to the negative impact his credit card debt had on his CIBIL score.

Keeping this situation in mind, it is always advisable to budget responsibly and use cash to make purchases wherever possible in order to minimise the risk of being weighed down by a maxed out credit card. Doing this will keep your card usage at a minimum and help build a credit history of sound money management.

As a parent, it is important that you teach your children, especially teens the importance of having a fair understanding about personal finance. From budgeting their allowances to controlling their spending habits, there is only so much you can guide your kids about. Teaching your teenage kids the importance of having and using a credit card is equally important. It is also important to educate them about the importance of having a high credit score. Therefore, it is your responsibility to teach your children about how to use a credit card responsibly.

Here are some important tips that will help you in educating your children about using credit card:

  1. Teach them the basics
  2. Start with the basics and educate your children about credit cards, credit limit, interest charges, paying debt and so on. It is important that you explain all these terms to them in detail. Tell them about the importance of a credit score and how their credit card usage will affect it positively as well as negatively. Your children should also be aware of the factors that will bring their credit score down. Make sure to teach them the importance of paying off all the credit card bills on time. Explain to them about various interest, charges and fees related to late payment of bills. All the above basics will give your children a detailed idea about do’s and don’t of using a credit card.

  3. Lead by example
  4. You should always practice what you preach. Therefore, in order to teach your children the best habits related to credit card usage, it is better that you follow them after all, kids lead my example. Be a role model for your children by practising the ideal credit behaviour. In addition to teaching your children credit about good credit card habits, the process will also lead you to a high credit score.

  5. Allow them to use the credit card
  6. After explaining them about the basics of credit card, it is time to actually let them use it. The right time to give credit cards to your children differs from person to person. You can either take an add on credit card on your existing credit card or even give them a new credit card. Ideally, they should use the card responsibly and it is better that you monitor their usage, at least initially. When they know that you are keeping an eye on their usage, they will take efforts to use the credit card carefully.

  7. Set certain ground rules
  8. Finally, once your children have a credit card, it is important to set certain ground rules. It is better to give them a set of conditions that they have to follow at the time of using the credit card. You can clearly list the scenarios where the credit card can be used. Also, be clear and strict about the monthly spending limit on the card. Ask them how they plan to repay the bills and that you will review the statement together at least for first few months. Finally, let them know that there will be consequences for violating the rules about credit card usage.

Use your credit card to regularly pay bills

Using your credit card to regularly pay your internet bills, phone bills or utility bills like water and electricity, can help build a positive credit history and improve your CIBIL score. Since these expenses tend to be much lower compared to purchasing material goods, the debt they incur on your credit card can be paid off quickly or within a short span of time.

Make repayments a habit

Even if you cannot pay off the entire amount you owe on your credit card, you should still strive to make the minimum repayments on or before the scheduled due date. This will show lenders that you don’t have a habit of reneging on payments and can be a good credit risk in the long run. Keep in mind however, paying off as much of your credit card debt as soon as possible can increase your CIBIL score within no time.

Although this is easier said than done, all it takes is a bit of willpower and smart credit card management to keep your financial status in the pink of health.

FAQs On Credit Card Improve Your Cibil Score

  1. Can I use a credit card to increase my credit score?
  2. Yes, a credit card is one of the best ways to improve credit and enhance your credit scores by demonstrating how you manage credit regularly. To increase your credit score, make sure to use your credit cards to make timely bill payments and use only a small portion of the available credit on your card.

  3. How many times a month should I use my credit card to build credit?
  4. To develop credit, you must use your secured credit card at least once every month. Credit is built even if you don’t use your card. However, making at least one transaction every month might speed up the process provided that it doesn't result in late payments.

  5. Is it good to leave a balance on your credit card?
  6. Leaving a balance on your credit card does not improve your credit score. Instead, you will be charged money in the form of interest. If you have a high balance on your credit card, your credit score will be lowered.

  7. Should I pay off my credit card bill after every purchase?
  8. Yes, to maintain good credit and avoid debt, it is advisable to pay off your credit card bill in full each month.

  9. What happens if I overpay my credit card balance?
  10. If you overpay, any money in excess of the sum due reflects as a negative balance on your account. Negative balances simply appear on your credit report as zero balances and have no impact on your credit utilization.

  11. What factor has the biggest impact on my credit score?
  12. Payment history is the most important factor that impacts your credit score. 

Read More on CIBIL

TransUnion CIBIL is one of the leading credit information companies in India. The company maintains one of the largest collections of consumer credit information in the world. CIBIL Score plays a key role in the lives of consumers. Banks and other lenders check the CIBIL Score of the applicants before approving their loan or credit card application. Consumers can visit the official website of CIBIL to check their CIBIL Score and Report.

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