Your credit score, a crucial three-digit number, is central to your financial credibility in the UAE. Whether applying for a personal loan or seeking a new credit card, your credit score, as rated by Al Etihad Credit Bureau (AECB), plays a key role. But how does your credit card usage impact this score? Let’s unravel this.
Key Factors of Credit Scores Influenced by Credit Card Usage
Payment History: The Foundation of Your Score
Your payment history is pivotal, accounting for approximately 35% of your credit score. It mirrors your reliability in repaying debts. Late payments or defaults are red flags to lenders, signaling potential financial unreliability.
Credit Utilization: The Balancing Act
The amount you owe, particularly your credit utilization ratio, forms about 30% of your score. High utilization can indicate overreliance on credit, which might worry lenders. Managing your credit card balances well is essential to portray financial stability.
Credit History Length: A Timeline of Trust
The duration of your credit history contributes around 15% to your score. Banks appreciate a longer credit history as it provides a broader perspective of your financial habits. However, responsible management of recent credit can also paint a positive picture.
Recent Credit Inquiries: The Double-Edged Sword
Each new application for credit, like a credit card or loan, typically leads to a ‘hard pull’ on your credit report. This can cause a slight, temporary dip in your score. Frequent applications within a short period could be interpreted as financial distress.
Credit Mix: The Diversification Advantage
The variety in your credit types contributes to about 10% of your score. A mix of credit cards, loans, and other forms of credit can demonstrate your ability to manage various credit types effectively.
Making the Most of Your Credit Card
Choose the Right Card: Select a credit card that aligns with your financial habits and goals. Consider cards from leading banks in the UAE, like First Abu Dhabi Bank, Mashreq, Emirates Islamic Bank …etc which offer cards tailored to various lifestyles and needs.
Monitor Your Credit Score: Regularly check your credit score with AECB to understand your financial standing and make informed decisions.
Responsible Usage: Ensure timely payments and maintain a low credit utilization ratio to positively influence your credit score.
Conclusion
Your credit card is a powerful tool that significantly impacts your credit score. Understanding and managing the key factors that affect your score is crucial. By choosing the right credit card and using it responsibly, you can steer your credit score towards a desirable level.
Also published on Medium.
