When I was discussing with one my friend, he proudly says that he uses credit card for every thing and pay the due before the due date, which makes him the most trusted customer for his bank. Here the important point is that, he even feels that it would improve his chance of getting more loan amount if he applies for a loan because of his repayment history of his credit card. Is that true?.
Not only him, many has the wrong opinion on using the credit card and how it impacts the credit history when you applying for a loan. I would like to ask this question to my friend “Say if you are paying the monthly credit card bill of Rs. 30000 when your take home salary is Rs. 60000. That means that your total expenses is 50% of your income and it is deliberately known to the bank by seeing your credit card payments. If you have the remaining amount Rs. 30000, then how can you pay the loan EMI if it is Rs. 30000.” That is how banks would look into your credit history. This articles explores some of the key points about using the credit card and how it would impact the credit history. If you have any questions, please post it in the comments section. If you are interested in receiving the future articles, please subscribe here.
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Credit card is a loan instrument
Many are not aware that credit card is a one kind of loan instrument for the bank customers. It is a temporary loan amount from bank with the free credit period where you need not pay the interest. Buying the most expensive goods with credit card and paying the EMI is one of the popular blunder by customers. The interest charged on credit card is very high.
When banks look into the credit card history while sanctioning loan amount for you, they consider credit card as the loan instrument. Obsessive use of credit card will lead to the less loan amount eligibility. Be wise when you are using the credit cards. Also note that don’t fail any of the dues which will have the negative points on your credit report.
How to mitigate the risk?
There are certain measures you can take to reduce the impact on credit history. The following are some of the points worth remembering:
- Don’t maintain more than one credit card on your name. Maintaining more than one credit card is not a good idea when it comes to the credit history. If you have any unused cards, please return that to the bank.
- Don’t ever fail to make the minimum amount due. This will have the penalty charges and the indications of failure to meet the due date. if possible pay all the amount in due date and avoid paying any extra interest charges.
- Don’t make all the purchases on credit card, that is not a good idea.
- Another very good option is, get a credit card on your spouse name and use it. If you are the only earning person and you only can apply for the loan, then try to get credit card for your spouse. That would reduce any liability on your name.
- Don’t run behind the reward points. Nowadays most of the banks and reward payment programs offering bonus points for using the credit cards. Don’t fall prey for those lucrative offerings.
I hope this article would have been more useful to the readers. If you are already using the credit card, lets understand the equations on how credit card interests are charged and how dangerous if you are not smart enough to mange them properly. If you have any questions, please write it in the comments section. We have more interesting articles in the coming days, stay tuned here.
February 8, 2013 at 1:21 pm
This is nice discussion on credit card specially card payment history reflect to our loan application.
But one thing I am not understand why we should not carry more than one credit card ?
February 8, 2013 at 2:34 pm
If you are using more than one credit card, the credit eligibility in the cards will be high, so it would affect the perception on you.
February 8, 2013 at 3:56 pm
Hi ,
I have gone through above article but fail to understand below points :
1) how buying expensive goods through EMI is badchoice when banks are not taking any interest for it if we pay in time.
2) Why we should not go for cards which offer reward points .
3) Even if expenses are 50% of the income , if am paying in time , it means i have good track record and may not prove to be a bad point as portrayed here.
Please let me know the answers here.
Thanks,
Ali KS
February 9, 2013 at 4:25 am
Hello Ali,
1. When you are buying goods using credit card for EMI, the processing charges will be more. Even though they say no interest, other charges will be levied on you.
2. It is not that you should not get reward points, here what I mean is when you are getting a credit card don’t give much importance for the reward points.
3. No. That is the very wrong opinion you have. If you spend 50% of your income and paying on time, Yes, you have good track record. But, you have bad spending habits. Though if you spend 50%, if you use credit card it exposes your weakness to the banks. It will reduce the loan eligibility.
Hope this clears your doubts.
Thanks,
Krishna