Building a Better Credit Score: Essential Tips for Responsible Credit Card Use

Credit cards have become one of the preferred payment methods among Indonesians, with ownership in the country reaching 14.4 million, growing by 8,3% year-over-year (YoY) as of March 2024. Aside from its function as a payment method, credit cards are one of the tools that can help you build a credit score.

A credit score is a numerical figure that ranks individuals or businesses based on their historical performance in meeting payment obligations. It also enables financial institutions to make more accurate decisions and facilitates individuals and businesses in accessing credit. A credit score is often represented as a three-digit figure that predicts how likely an individual or business is to repay loans and make installment payments punctually.

How Credit Cards Contribute to Building a Strong Credit Score

As a leading private credit bureau, PT CRIF Lembaga Informasi Keuangan (CLIK) highlights that data from credit card usage is recorded in the Sistem Layanan Informasi Keuangan (SLIK) OJK database, which serves as the primary reference for Financial Institutions (FIs) when evaluating the creditworthiness of potential borrowers.

“Financial institutions utilize this data to determine the risk of lending money or extending credit. A higher credit score suggests lower risk, which can result in more favorable loan terms, including lower interest rates and higher credit limits. On the other hand, a lower credit score can lead to higher interest rates and stricter loan terms, reflecting the higher risk associated with lending to that individual,” explained President Director CLIK Leonardo Lapalorcia.

Leonardo further emphasizes that responsible credit card usage is one of the most effective methods for building a good credit history. Here are several ways in which credit cards can help you build a strong credit score:

• Payment History

Your credit report heavily depends on your payment history, which makes up a substantial portion of your credit score. The SLIK database records each on-time payment you make on your credit card. This consistent payment behavior signals to lenders that you are reliable and capable of managing debt responsibly, which is crucial for a strong credit report.

• Credit Utilization Ratio

This ratio compares the amount of credit you’re using to your total credit limit. Credit cards allow you to demonstrate that you can use credit wisely by maintaining a low credit utilization rate. Ideally, keeping your credit card balance below 30%  of your total credit limit shows that you’re not over-reliant on credit, which positively impacts your credit score.

• Credit History Length

The length of time you’ve had a credit account open also contributes to your credit report. Credit cards that have been active for a long period enhance your credit history, demonstrating that you have a stable credit record. SLIK tracks this information, and a longer credit history generally results in a better credit score.

Common Credit Card Mistakes That Affect Your Credit Score

Excessive spending is one of the most common issues with credit card usage, according to CLIK analysis. The convenience of swiping a card can lead to impulsive purchases that exceed an individual’s budget. Unlike cash transactions, which offer a tangible sense of expenditure, credit card use can make it easier to lose track of spending.

Late payments are another common credit card mistake that can significantly damage your credit score. Failing to make your monthly payment on time can result in interest charges and late fees. More importantly, it sends a negative signal to lenders, indicating that you may not be reliable in meeting your financial obligations.

To maintain a good credit score, it is essential to regularly monitor your credit score through credit bureau services such as those offered by CLIK. “Keeping yourself informed about your credit score enables you to detect errors, track your progress, prevent fraud, and make well-informed financial decisions. It ensures that you are always aware of your credit standing and can take proactive steps to improve it, ultimately leading to better financial stability and greater opportunities,” Leonardo concluded.

By understanding and implementing these practices, you can use credit cards to build a strong credit score, paving the way for financial stability and access to necessary financial resources when needed.