Credit cards have become a part of our daily life, as we all love to use credit cards for making daily transactions like shopping, and fuel, we use them for dining at premium restaurants and carrying them along when traveling abroad. It is not wrong to say that credit cards are one of the best financial instruments that almost everyone can get their hands on. The purchases made with the cards can be paid back after a while without facing any charges. The benefits of a credit card doubles when you carry a mid-range or a premium credit card. But have you ever thought that every transaction or all the activities that are done on your credit card are connected with your credit score?
Your credit score reflects your past performance on how you have managed your credit. One wrong move can impact your credit score to certain limits. In worst cases, if you maintain a very bad credit score, your card issuer may also cancel your credit card. Therefore, in this article, we are going to talk about some most dangerous transactions that are really bad for your credit score. Keep reading for more information.
What is a Credit Score?
A credit Score is a three-digit score provided to an individual on the basis of their past repayment history and debt holding. Basically, it is a report that signifies how you have performed financially in the past. Most credit card issuers check your credit score before issuing a credit card. Better the credit score, the better would be your credit card variant and the credit limit on your card. Also, there is a high chance that your credit score will be impacted on the basis of your credit card spending and usage. This is why it is advisable to use a credit card wisely.
The credit score is not only checked by banks when issuing credit cards but it is also checked by financial institutions and loan providers when you apply for a new loan or any other type of credit. The size of the loan granted by the bank will depend upon the credit score you have. So, having a high credit score will always get you a loan without any problem.
Credit Card Transactions That Impact Your Credit Score
A Credit score may seem like just a 3-digit number but it can cost you a lot. Therefore, if you want to maintain a good credit score or improve your credit score then there are some transactions that you must avoid at all costs. These transactions are very common to happen, therefore, you must use your credit card wisely. Following are the transactions that are dangerous for your credit card and must be avoided:
Late Bill Payments
Every credit card comes with a billing cycle that lasts for around 25 to 30 days. At the end of this period, the cardholder is provided with the credit card bill which is expected to be paid by them before the due date. If the cardholder does not settle the bill by the due date, then they have to face heavy interest charges. The card issuers do not generally report late payments to the credit score bureau, but they will if you default on the bill payment more than once.
An Outstanding Bill arises when you default on your credit card bills for a few periods as discussed above. The outstanding amount on your credit card keeps incurring interest charges and forms a big amount. This way the cardholder can also fall into a debt trap if the amount is not settled anytime soon. Moreover, a long outstanding bill impacts your credit score directly and is regarded as a bad sign by many credit card issuers.
Cash Advances are cash withdrawals done with a credit card. These transactions not only carry cash advance fees but also face interest charges applicable to credit cards, which may result in a high outstanding balance on your card. And if you fail to make this payment on time, your credit score will surely come down. Therefore, one should never withdraw cash using a credit card unless it’s a real emergency. Though cash advances do not directly impact your credit score, any default on the payment of the same will impact your credit score.
Making Big transactions or a high credit utilization ratio on your credit card can affect your credit score directly. Therefore, always make small transactions and avoid making big purchases in one go. This will also help you in maintaining a lower credit utilization ratio. Even if you want to make a big purchase, make sure that your credit limit is high enough that you will not spend more than 30% of it.
Minimum Amount Due (MAD)
Credit cardholders have the facility to pay a minimum amount of their credit card bill to avoid late payment charges. However, the interest rates on the outstanding amount are still applicable to the due amount. Therefore, you should always pay your credit card bill in full to avoid interest charges and a bad credit score.
The way you use your credit card and the transactions that you use it for being one of the factors that affect your credit score. Therefore, one should use a credit card with due care and use it wisely. Otherwise, even a small mistake can cost you a fortune and ultimately will impact your credit score. A good credit score is appreciated highly by card issuers and also by loan providers. Let us know in the comments below if you want to know anything about credit score and transactions that could affect your score.