How Credit Score Impacts Your Credit Card Interest Rates?
A credit card is a must-have financial tool that allows you to do online shopping and pay for it later. And, although there are credit card companies in India that offer a variety of credit cards, getting one greatly hinges on your credit score. A three-digit number ranging from 300 to 900 reflects your creditworthiness and behaviour.
Typically, credit bureaus calculate and assign a credit score to all individuals based on a few critical factors like credit utilisation ratio, length of credit history, mix of credit, past credit payment records, new credit inquiries, etc. Financial organisations issuing credit cards refer to major credit bureaus like CRIF credit scores to assess the risk associated with issuing the card to you.
In this guide, we explore how your credit score affects credit card interest rates and what you can do to improve your credit score.
How does credit score impact the credit card interest rate?
Companies that issue credit cards typically use a risk-based pricing method to determine credit card interest rates. Therefore, the interest rates levied on credit cards may vary from person to person based on their credit history.
If you have always maintained a good credit score, and the same reflects in your credit report, the credit company will get a fair idea that you have managed your credit well in the past. They also refer to your credit information to predict your future behaviour. So, if you have a history of timely payments and responsible credit usage, credit card companies may view you as a low-risk customer and offer you better terms.
Therefore, by consistently displaying good credit behaviour makes it easier for financial organisations to assess your creditworthiness and offer favourable interest rates.
Why does a low credit score result in high interest on a credit card
It is now obvious that the financial organisations decided the interest rates by the credit score of the applicant. A strong credit score or history is built over time through timely payments, maintaining a low debt-to-credit ratio, and avoiding financial issues like defaults or excessive debt.
It could also mean that you are taking your first step in the world of credit, and you have not established a positive credit track record. Irrespective of the factors affecting the credit score, by maintaining a healthy credit score and responsible financial habits, banks are more likely to consider you a trustworthy customer and offer better credit card options.
From their perspective, a strong credit history with consistent on-time payments reflects financial responsibility and reliability. As a result, individuals with higher credit scores often receive lower interest rates, reflecting their history of responsible credit management.
So, if you are still wondering why having a good credit score is important, you know the answer. It allows you to get a credit of your choice easily without worrying about paying a high interest, which could dent your finances. A good credit score ensures that you can access credit when needed, making purchases more manageable and affordable.
How to improve your credit score?
If you are looking for ways on how to improve your credit score to access better financial opportunities, the good news is that with consistent effort, achieving a higher score is entirely possible. All it requires is for you to be resolute and responsible with finances. You can use the following tips.
• Review your credit report
Today, there are many online services that allow you to do a free credit score check and get a full credit report. It is a good practice to review your credit report frequently, at least once every three months. This will help you get an understanding of your current credit standing and the factors that influence your credit score.
You can identify areas where you can improve and take appropriate measures. Also, reviewing your credit report allows you to spot errors or inaccuracies in the report that may potentially lower your credit score.
• Make on-time payments
Paying credit card bills and loan EMIs on time strengthens your credit score and establishes a reliable credit history. So, make paying the credit bills on time your priority. If needed, set a reminder or automate the payments so that you don’t miss paying the bills. It will also help you avoid paying a hefty penalty.
• Keep the credit card balance low
Let us assume you have a credit card with a credit limit of Rs. 1 Lakh. It may be tempting to shop freely and use the credit limit. However, always remember the importance of your credit score and try not to exceed 30% of the credit limit available to you. This will automatically keep your credit card balance low, you can easily pay off the dues, and you can maintain a good credit score and history.
Conclusion
Your credit score has a direct impact on the credit card interest rates. Maintaining a good score will reflect your responsible credit behaviour, you can easily get the credit card of your choice with a lower interest rate and enjoy a great user experience.
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