Credit card holder? Seeking loan? Check why your transaction history matters and what are its impacts

Credit cards are in popularity across the globe. They come quite handy, as they are one form of loans which do not require any documents but only salaries. These days, getting a credit card has become easier in just few clicks. Every banks like SBI, HDFC Bank, Axis Bank, ICICI Bank, Bank of Baroda, PNB, Citi Bank and many other private and state-owned ones, allows you to have a credit card at a minimum a salary starting between Rs 20,000 to Rs 25,000 per month. But when you talk about credit card, you must note it is a checklist for your credit score which will be seen by lenders in giving you home, personal and car loans. If you are among defaulters in repaying your debt, then your credit history is among blacklist ones, and hence they will impact your future loans. 

Ranjit Punja CEO and Co-Founder, CreditMantri says, "While earlier only lenders used it when they received a loan/credit card application, now even the borrowers have become prudent and started to check their credit score on their own before applying for credit.”

Punja adds, “While checking credit score is imperative, knowing what affects credit score is equally important, as only after knowing what affects your credit score, you would be able to act responsibly towards those factors."

These factors that affect your credit score are:

Payment History: If you have paid all your loan EMIs and credit card bills on time for your existing/previous accounts

Number of Hard Enquiries: How many times you have applied for a loan/credit card with a bank/lender. The lower the better

Portfolio Age: How old your loan or credit card accounts are. The older the better

Credit Card Utilization Ratio: How much percentage of your credit card limit you have utilized for each credit card. Ideally, it should not exceed 40%

Borrowings Mix: The mix of secured credit (that requires a security) and unsecured credit (that doesn’t require a security) in your portfolio. The mix should have both secured and unsecured credit

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However, Punja explains about in detail over credit history and the length of their impact on your credit score. Let’s understand! 

Every day, we tend to receive a myriad of offers for credit cards where we can get unlimited reward points at no cost. And these credit cards are in fact better than the credit cards we possess. So, allured by these propositions, we sometimes opt for these cards by closing our existing credit cards.

There is one thing you need to consider before closing any credit card account: Is your average age of accounts reducing considerably. As mentioned above, length of your credit history has some effect on your credit score.

When you apply for loan or credit card, banks/lenders usually check your average age of accounts. This is done to view how consistently you have been making payments on your dues. If you have been a responsible credit user in the past for a good period, lenders will view that as a healthy sign that you would be able to repay their dues as well.

If your average age is low, lenders won’t be able to gauge your consistency in repayments, and hence, this could affect your interest or approval chances. So, if you close your old credit cards on which you have been making consistent repayments and open new ones in their lieu, or open multiple new credit accounts within a short duration, your average age of credit accounts will reduce, which would have some impact on your credit score.

That being said, repaying your dues still has more weight on your credit score than the length of your credit history. So, if you can foreclose a loan with no substantial fee, you should definitely opt for that as you won’t have defaulted on that loan.

Finally Punja says, "As the length of your credit history has an effect on your credit score, you should be cautious before opening new credit card accounts by closing the old ones on which you have consistently been making payments, or opening multiple new credit accounts at the same time.”