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How to use Credit Card to build Credit?

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Kim recently applied for a home loan to get funds for her new apartment, but her application got rejected as the bank was not content with her credit score. She repeatedly delayed paying her credit card bills without realising that her credit score was getting affected. This made it very easy for the Credit Bureau of Singapore (CBS) to determine her creditworthiness or the lack of it effectively.

If you feel that you would require a loan a couple of years from now, then you should start putting more effort to improve your credit score before it is too late. Using your credit score, lenders get an indication whether you are going to repay your credits or not. The score will significantly influence how much you can borrow for your other important items. The higher your score, the better your odds of receiving loans.

Things to do with your credit card for a better credit score

All banks, non-banking financial institutions and credit card firms share your repayment data with CBS. This organisation is an all-inclusive consumer credit agency. It aggregates the data it receives from banks and other financial organisations and shares it with members when requested. The easiest way to enhance your credit score is by getting a credit card and using it responsibly. Most banks will offer credit cards to people with no credit history, though it may be trickier to get one if your credit score is already low.

Let us now take a look at the various steps that you can take to strengthen your creditworthiness using your credit card:

Clear all dues whenever you can

Credit card companies will give you the option of paying a minimum amount every month. Try to pay off as much as you can each month on your bill. In the long run it will become tough to repay the entire amount, and the best approach is to clear as much as possible in the shortest period possible.

Limit credit enquiries

All credit enquiries will be recorded in your credit report, even it is for a credit card. As a result, applying for too many credit cards and personal loans in a short span indicates that you are going through financial problems. We Singaporeans often get enamoured by welcome gifts and apply for several credit cards at once. But this habit may lead to the lenders suspecting your ability to make repayments. So, avoid applying for many credit lines in a short period.

Check for errors in credit report

Always a keep a tab on your credit report and check for any errors relating to credit card bills, loan amounts, payment schedule and more. Are the outstanding balances mentioned in your report correct? If you are on time with payments, check for erroneous late payment details.

Get the most appropriate card

Just as no two persons are the same, different cards have different features. With so many different options available to you, choose a card that gives you adequate benefits to pay off the annual fees and other charges. Even though a bank might offer a card by taking into consideration your account activity, make sure to do enough research yourself. Get a clear understanding of all the benefits and the fine print of the credit card.

Opt for a card with 0% instalment payment plan to make large purchases

If you are thinking of making large purchases in the near future, go for a card with 0% instalment payment plan. It will help you split large purchases into monthly instalments so you can avoid paying high interest charges on them.

Keep the card account active

There will be times when you feel that you do not require a credit card to make any purchase. However, over a period of time, low credit exposure will bring your credit score down slowly. So build a habit of using your card to make at least a couple of purchases every month and pay the entire bill.

Pay the bills on time

One of the biggest factors that brings credit score down is late bill payment. Under normal circumstances, the interest-free period would last until the due date. So to avoid getting charged for late payment, avoid missing the due date by activating the bank’s SMS alert service or make the payment as soon as you get the bill.

Use credit card sensibly

Avoid using your card for all payments. Ideally you should set a budget as per your income – do not go beyond that budget under any circumstances. Keep in mind your capacity to repay before making a decision on what to purchase. Excessive utilisation of credit is not a good practice. Try and keep it low to maintain a good credit score.

Things not to do with credit card

Let us take a look at things that you should avoid doing with credit cards to prevent the credit score from dropping:

Getting more than two credit cards

Just because you want to improve credit score doesn’t mean you apply for every other card available in the market. If you apply for 2 or 3 credit cards within a short span, you will be considered as desperate for credit. Subsequently, the credit score will go down a notch and your applications may be overruled.

More number of cards means a higher credit exposure. As a result, banks will not be willing to give you additional loans, saying that your capacity to repay would be reduced. So, get only one or at the most two cards and use them frequently and sensibly.

Making minimum payments

Avoid the habit of paying just this minimum amount every month as you will only add more to your bill and pile up interest charges for the next month. Pay at least 50% of the bill or pay the entire sum, so that your dues can always be managed.

Piling up debt on multiple credit cards

Spread out the expenses on all cards in a manner that you never max out on one particular card. If you keep on piling up debt on more than one card, you are likely to lose track of your outlays and ultimately, the bills will become a huge mountain to climb.

A little struggle can be very useful in the long run to raise your credit score. Keeping a tab on the credit score will pay rich dividends. This is particularly true if you are thinking of applying for a home loan. If you raise your score by a few notches, it might help you get a bigger loan amount. At the very least, a good credit score will make the process of borrowing quicker and easier.

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