How credit card can help improve your credit score comprehensively if it slips below 600, know what experts have to say

In the realm of personal finance, a fundamental aspect that often decides one's financial journey is the credit score. But what exactly is a credit score, and why does it hold such paramount importance? 

A credit score, typically a 3-digit numeric summary, encapsulates an individual's credit history. It mirrors past credit behaviour, depicting how well they have managed various credit products like home loans, business loans, auto loans, personal loans, or credit cards. Commonly referred to as credit score, it serves as a measure of one's ability to borrow from financial institutions like banks/NBFCs. Calculated based on monthly credit information provided by lenders, it serves as a crucial tool for both borrowers and lenders alike.

In essence, a credit score acts as a litmus test for lenders, gauging the reliability of a borrower and the probability of timely repayments for any new credit extended. When individuals apply for loans or credit cards, lenders scrutinise their credit reports, evaluating repayment capabilities and creditworthiness.

With a scale ranging from 300 to 900, a higher credit score increases the likelihood of approval for new credit facilities. Typically, a credit score of 750 and above is deemed a standard benchmark by lenders, signaling a low-risk borrower. However, some institutions may consider scores as low as 700 for credit card approvals.

Benefits of a good credit score

A good credit score is often the passport to smoother financial transactions. Lenders prioritise applicants with high credit scores, making loan or credit card approvals a seamless process. Moreover, a favorable credit score might translate into lower interest rates, reducing overall interest outflows for loans.

What is a good credit score?

Understanding what constitutes a good credit score is vital for financial planning. In contemporary times, a score of 750 and above from CIBIL or any credit bureau is generally deemed favourable by lenders. However, it's essential to monitor scores from multiple bureaus to ensure comprehensive financial health.

How does credit score get affected?

Your credit score is influenced by timely loan repayments, credit history duration, hard inquiries, credit utilization, and credit mix. Additionally, errors in your credit report, lack of credit history, and failing to fulfill loan guarantor obligations can also affect your score negatively. 

What do experts say?

Umesh Mohta, Head of Credit, Niyogin Fintech Limited says "gaining back a CIBIL score that has fallen below 600 is a difficult but attainable objective, particularly when using credit cards wisely. The path to betterment depends on persistent work and disciplined financial behaviour. It is possible to see noticeable gains in as little as six months to a year by using credit cards properly, which includes maintaining utilisation below 30%, paying on time, and not taking on new debt." 

"It's important to be persistent and patient, and to keep an eye on your score and make any necessary corrections. It's crucial to gradually prove your creditworthiness to lenders by demonstrating your ability to handle credit responsibly. Although credit cards may be useful instruments in this rebuilding process, you must use them carefully to regain credibility and progressively raise your credit score," he added.

AR Hemant, AVP, Bankbazaar.com says, "credit scores are positively impacted by timely payments. If your score is below 600, there would be some serious reason for that such as late payments, default, or loan settlement."

"If you need your score to improve from 600 in the short-term, you need two things: (1) ensure your ongoing payments happen in full and on time and (2) you have a way to address your default or settlement so that it can be struck off your record. Work with your lender to assess options such as restructuring the stressed loan, or closing that loan with full repayment. There should be an open communication line with the lender to facilitate this."

Sameer Singh Jaini founder and CEO of The Digital Fifth says, "its important to showcase regular behaviour and a track record of on-time payments for them to reflect significantly in your credit score. While score computation is based on multiple factors, regular payments for  6-12 months typically reflect considerably on an improved score."

Manish Jain, Country Managing Director, Experian India says “as a credit bureau, we understand the importance of maintaining a healthy credit score. If your score falls below 600 and you only have a credit card as your credit line, it is possible to recover and improve your score within a few months."

How can credit cards help improve credit scores?

Credit cards, often perceived as double-edged swords in personal finance, can significantly impact credit scores. By adopting prudent financial practices, credit card holders can enhance their creditworthiness:

• Clear Outstanding Dues Promptly: Timely repayment of credit card dues not only averts late payment charges but also boosts overall credit scores.
• Exercise Caution with Multiple Cards: Owning multiple credit cards may signal financial strain to lenders. Hence, prudent management of credit card ownership is crucial.
• Optimal Credit Utilisation: Striking a balance between credit utilisation and repayment capacity is pivotal. Exceeding credit limits poses risks and may dent credit scores.
• Vigilant Monitoring: Regularly reviewing credit reports aids in identifying discrepancies and ensures sound financial planning.

A good credit score is not merely a financial metric but a gateway to favorable financial opportunities. By adhering to prudent financial habits and leveraging credit responsibly, individuals can pave the way for a secure financial future. So, whether it's managing credit cards or maintaining a healthy credit score, proactive financial management is the key to financial well-being.