How credit card default impacts credit score?

As a credit card owner, here are some key facts you should know about credit cards.

What is a Credit Card?

A credit card is an amount of money that is sanctioned by your bank to use, on a revolving basis every month. Based on your current salary, you are set a pre-approved limit of money which you can use for a variety of purposes. Out of this pre-approved limit, whatever amount you spend has to be paid back to the bank within a fixed time limit, usually within 30 days, failing which you will be charged interest on the money you have not paid back.

What are the types of Credit Cards?

There are many types of credit cards in the market with various features and rewards associated with them.
These include:

1. Travel credit card
2. Shopping credit card
3. Entertainment credit card
4. Fuel credit card
5. Business credit card
6. Lifetime credit card

Why is it important to keep a clean Credit Card payment history?

Having a credit card has many benefits like using it instead of cash when you are running low on your savings account. But what happens when you don’t make credit card payments on time?

1. Interest payable after due date: If you pay before or on the due date every month, you don’t have to worry about paying interest. But if you don’t pay on time, you will have to pay a high rate of interest on the outstanding next month. Interest rates range from 15% to as high as 42% per annum. Clearing your dues regularly every month is a habit that should be followed.
2. Accumulated interest: Interest on unpaid dues on your credit card gets automatically added to the total outstanding. This ends up into a huge amount if not cleared quickly and can be very difficult to clear later.
3. Credit Card disputes: If this interest is not paid, your credit card can get blocked and it can get into a dispute with the credit card issuer. Debt collector agencies can be pushy and repeated calls from your credit card issuer can be stressful. Clearing past dues is easier with the help of a credit advisory service like Credit Monitor.
4. Low Credit Score: Unpaid credit card dues impacts your credit score negatively. This score is checked by lenders every time you apply for a new credit card or a new loan. A poor Credit Score means that the lender will be less willing to offer you a new credit card or loan leading to repeated credit card or loan rejection.

What is a Credit Score? Factors which affect your Credit Score?

Credit Score is a figure that measures the creditworthiness of the loan applicant, based on multiple factors like past credit card repayment history and social score. Your credit score considers all financial transactions wherein you have borrowed and repaid money and determines whether you should be issued a new credit card. Financial lending institutions and banks keep track of a borrower’s payment history across credit cards and loans, no matter which bank the card or loan was issued from. The payment history of a borrower gives an indication of whether the borrower can repay loans on time.

Any payment default, any missed EMI, any old unpaid credit card dues affect your credit score negatively. Your Credit Score shows whether you have borrowed and returned money responsibly in the past. It gives the lender a fair idea of whether you are likely to repay the loan on time or not.

Most customers have a Credit Score that ranges between 300 to 900. A good Credit Score of 750+ is considered healthy and is more likely to get loan approval easily. A poor Credit Score of below 600 is considered risky and it is difficult to get a credit card sanction with such a rating. Even if such a credit card gets sanctioned, it is often at a higher rate of interest.

What factors affect your Credit Score?

1. Payment history: Delayed payment of your current credit card affects your credit score.
   
2. Payment Default: Old unpaid credit card dues affect your Credit Score.
3. Current Credit outstanding: Any outstanding against your name figures in your credit history.
4. Multiple Loan Applications: Keep in mind that every application for a loan reduces your credit score. So do not apply for a personal loan to multiple lenders at the same time. Wait for one bank to approve or reject, then apply afresh to another bank.
5. Credit Utilisation: A low usage of available credit shows low dependency on credit and this is good for your Credit Score. . Generally upto 30% usage of available credit is acceptable. Anything over that indicates that issuing a new loan to you would be risky for the bank.
   

Tips to improve your Credit Score

1. Credit Repair: Old unpaid dues on your credit card have a negative impact on your Credit Score. Negotiate with your loan provider or a trusted credit advisory service for a flexible payment plan that suits you.
2. Timely Debt repayment: Pay your debts/ EMI/ credit card dues on time. Set payment reminders and limit credit card usage. This helps your credit score in the lon run.
   
3. No defaulting accounts: Negative information on your past loans or credit cards like Foreclosure, Writeoff, Settlement have a negative impact on your Credit Score.
4. Limit new credit requests: Too many loans in your history reduce credit points. The lower the debt, the easier it is to maintain a healthy Credit Score.
5. End loan disputes: If you have taken a loan and missed paying your EMIs on time, this broken period impacts your credit score. Talk to your bank for a flexible payment plan that you can manage.
6. Good credit history: Know what factors impact your Credit Score. Any kind of loan, payment default, missed payments, all these affect your Credit Score.