Credit Cards: How do they affect your credit score and loan eligibility?

Credit cards are a great way to save smartly on your transactions and earn exclusive rewards and discounts on your favourite brands. Credit cards may affect your credit history and also impact your credit score as well as your future loans. If you utilise your credit card appropriately, it can help you to create a good credit score.

However, it can also severely harm your credit worthiness if you are not careful with the usage. Let us understand how credit cards influence your credit history and impact your future borrowing:

Building credit history

Credit cards are generally the first type of credit which people usually take. Hence, in a way credit cards make the foundation of your credit history. When you start spending your credit card limit, lenders start analysing your spending habits and send your repayment history, credit utilisation and your credit account details to the credit bureaus.

Based on this, credit bureaus create your credit score. If you are punctual and stay ahead of your bills, then you can create a strong credit score which will help you get low interest rates on future loans.

Effect on credit score

Credit score is evaluated on the basis of your credit card usage and spending habits. Timely payments of your credit card bills are crucial. A single missed payment can take a toll on your credit score and remains in your credit report for a long time. Maintaining a credit utilisation ratio below 30% shows good credit management, and therefore improves your credit score.

Rohan Bhargava, Co-founder of CashKaro and EarnKaro shared his insights on this and said, “Using a credit card responsibly helps establish a strong credit history, demonstrating your ability to manage credit effectively. Aim to utilise only 30-40% of your credit limit to maintain a low credit utilisation ratio, which is vital for a good credit score.”

“A high credit score enhances your chances of securing loans with favourable terms, such as lower interest rates and higher amounts, while poor management—like missed payments or frequent credit applications—can harm your score and reduce loan eligibility. Responsible usage signals financial reliability, whereas high utilisation or multiple applications suggest risky behaviour to lenders,” he added.

Impact of credit cards on loans

Loan approvals:When you apply for a loan, the lender always considers your credit score to evaluate your credit worthiness. Paying your credit card balances on time and keeping your credit utilisation ratio in line reflects a healthy credit profile making you eligible for a loan. On the other hand, a bad credit history will reduce your credit score and as a result your chances of getting a loan will decrease.

Interest rates:A healthy credit score attracts lower interest rates. If you have been using a particular lender issued credit card, then getting a loan under your terms is much easier if you approach the same lender. However, you need to ensure that you are on good terms with the lender and your relationship manager.

Loan amounts: If you are taking an unsecured loan, your credit history is extremely for the lenders to evaluate because of the risk involved in getting the amount back in time. If you have been using a credit card with a decent limit and have been regular in repayments, your credit score will hopefully increase, hence, it increases your chances of getting a bigger loan.

In conclusion, credit cards are important while determining your credit report. If you keep your bills clear and pay them timely, you can build a healthy credit score which can help you get the best deals on your future loans. On the other hand, if you fail to repay your bills on time and make defaults, it can result in loan rejections, high costs of borrowing and poor credit scores.

(Note: Using a credit card carries its own set of risks)