Why credit card is important for your financial health

Why credit card is important

A person can enjoy his wealth only when he is in good financial health. A credit card plays a significant role in maintaining the financial health of a person. Also, a credit score in good health is the key to living a happy financial life. Therefore you need to be alert before credit card apply.

Every person comes to a point in life where he needs external financial help. When the situation arrives, a loan comes handy. There are a lot of options for borrowing money, but before a credit card apply, one must know that it will not only provide you loans but offer rewards and cashback on making transactions. A credit card is like a double-edged sword, therefore it needs to be handled with care. Otherwise, it can push you in lifetime trouble.

Determining the weightage of credit components:

A credit card is a mixture of several credit components. Every component has a weightage according to which a credit bureau develops the scoring system. The overall weightage carries 100% out of which the payment history of a person has 35% weightage. The length of credit history has 15% weightage, the type of credit card you are using has 10% weightage, the addition of new credits has 10% weightage and how much you owe to it has 30% weightage. The percentage of weightage decides which component is liable for the rising or downfall of your credit score.

Effects of credit components in financial health:

Every component of the credit card says something about the condition of your financial health.

● Payment history

The payment history is a record of timely, late and missed payments made through the credit card. It provides an indication of the potential lenders about your successful payments and debts. It always clearly says about the moment you have gone into defaults. Most potential lenders check your payment history to analyze your payment behaviors. Payments that are made after due dates have an adverse effect on your credit score. As the negative score keeps increasing the time to repay the obligations will increase as well. A credit bureau considers several factors while computing the credit score of a person, such as how late the payments were. The payments are reported as 30, 60 and 90 days late, longer the duration severe the consequences will be. Secondly, how recent the late payment was if it is years back, it won’t affect your credit score. Lastly, the amount and number of late payments. The higher the number, the greater will be the effects

● Length of Credit History

It shows the credit management capability of the borrower. The longer the history of. excellent credit management, the better the score will be. The lender will be able to look at your repayment pattern. If you have paid all your bills and debts on time, you are in a good financial state. Thus, if you can keep up with this, credit card apply is a good idea

● Newer credits

The mix of credit you access concerns the financial health. If you have so many credit accounts at a point, it may be riskier. Every time you apply for a new credit line, the application goes for an inquiry. Whereas when you opt for a car loan or any other mortgage, there will be multiple inquiries. In general terms, it is known as a hard hit. On the contrary, applying for numerous credit cards in a short span will be counted as multiple hard hits and result in lowering your score. However, the borrowers with excellent credit history do not need to take this into consideration. This is something that you must know before a credit card apply

● Rate of Credit utilization

Your method of credit utilization determines how much debt you are carrying in your account and how well you are handling it. If you have a high outstanding balance in your account or almost have maxed out your limits, then it will affect your financial health. The thumb rule is to never exceed more than 30% of your total credit limit. The payment pattern of the installment demonstrates the responsible behavior of debt management. It favorably affects the financial health of a person

Using your plastic money responsibly is the key to live a financially healthy life. By maintaining a good credit score, you will automatically get rid of a number of problems coming your way. In the end, everybody wishes to save for the stuff that matters and not keep paying the debts throughout life. Therefore, one must keep in mind the points mentioned above to lead a financially sound life.

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