Understanding these key credit card terms is essential for managing your credit responsibly and maximizing benefits. Here’s a breakdown:
1️. Credit Score
- Your credit score indicates your creditworthiness and ranges between 300 and 850.
- Credit card companies use this score to assess your reliability for lending.
- FICO is the primary scoring model lenders use. Here’s how your FICO score is calculated:
- Payment History (35%): Timely payments help; derogatory marks.
- Amounts Owed (30%): Keeping your credit utilization low boosts your score.
- Age of Credit History (15%): Older accounts are better for your score.
- Credit Mix (10%): A diverse mix of revolving (credit cards, HELOCs) and instalment accounts (mortgages, auto loans) helps.
- Credit Inquiries (10%): Too many hard inquiries in 12 months can lower your score.
2️. Payment History
- This is the most important factor (35% of your score). Make sure you consistently pay your credit card and loan bills on time to maintain a positive payment history.
3️. Credit Utilization
- This refers to how much credit you’re using versus your total credit limit. Keeping this below 30% is ideal for maintaining a healthy score. For example, if your credit limit is ₹1,00,000, try to use ₹30,000 or less.
4️. Credit Age
- The longer you’ve had credit accounts open, the better. If you’re thinking of closing old accounts, keep in mind that doing so could shorten your credit age and impact your score negatively.
5️. Hard Inquiries
- These occur when a lender checks your credit report as part of the approval process (e.g., when you apply for a new credit card). Too many of these can lower your score, so apply for credit sparingly.