How to Use Credit Cards Effectively to Improve Your Credit Score

Owning a credit card is no longer a rarity in today’s modern life. However, understanding how to use a credit card smartly to enhance your credit score is a challenge that not everyone masters. If you’ve recently acquired THE FIRST credit card from Shinhan Finance, this guide will be your companion in managing your card efficiently.

Understanding Credit Scores

Similar to how schools evaluate academic performance through grades, a credit score is a "financial report card" that measures an individual’s (or an organization’s) ability to manage finances. A high credit score indicates strong financial health and repayment capability, whereas a low credit score reflects financial risks.

With a high credit score, you are more likely to get approved for loans with higher limits. Conversely, a low credit score can lead to loan rejection, which can be problematic if you plan to make significant purchases, such as a home or business investment, in the future.

Why is Credit Score Important in Finance?

Credit scores provide lenders—such as banks, credit institutions, and financial companies—with insights into the financial management capability of borrowers. Lenders use this score to assess potential risks, minimizing losses from bad debts.

The higher your credit score, the lower your credit risk, increasing your chances of loan approval with higher limits and better terms. On the other hand, a low credit score signals high risk, making it difficult—or even impossible—to qualify for a loan.

Let’s explore strategies to improve your credit score through more effective credit card management.

Basic Practices for Improving Credit Scores with Credit Cards

1. Pay Credit Card Bills on Time

This is the "golden rule" of credit card usage. Timely payments demonstrate reliability to lenders. Late payments, on the other hand, indicate poor financial management or a lack of credibility. Financial institutions are unlikely to trust borrowers who fail to honor repayment commitments.

2. Keep Your Credit Utilization Ratio Low

Your credit utilization ratio refers to the percentage of your available credit that you’ve used. For example, if The First credit card has a limit of 20 million VND and you’ve spent 5 million VND, your credit utilization ratio is 25%. Aim to keep this ratio below 30% to avoid financial strain and ensure your credit score remains unaffected.

3. Avoid Closing Old Credit Cards

Many people believe closing unused credit cards helps avoid maintenance fees. However, the longer your credit card history, the more stable your credit profile becomes, positively impacting your score. Closing old cards can reduce your credit score by eliminating long-standing credit history.

Strategies for Boosting Your Credit Score

If you’re aiming to increase your credit limit or enhance your credit profile, consider the following strategies:

1. Use Your Credit Card Regularly

Don’t let your credit card "hibernate" in your wallet. Use it frequently for small, everyday expenses such as paying for coffee or groceries. Ensure you pay off the full balance before the due date. Regular usage with timely repayment shows lenders you are a responsible cardholder.

2. Monitor Your Credit Report Periodically

Regularly reviewing your credit report helps you identify whether your credit card usage is reasonable and highlights areas for improvement. This practice can prevent you from falling into excessive debt or becoming a delinquent borrower.

3. Diversify Your Credit Portfolio

Your credit profile is not limited to credit cards but also includes other forms of credit, such as car loans, personal loans, or mortgages. A diverse credit portfolio enhances your financial profile and boosts your creditworthiness in the eyes of lenders.

Mistakes to Avoid When Using Credit Cards

1. Making Minimum Payments Only

Paying just the minimum due each month to avoid late fees is an inefficient strategy. While it helps you avoid penalties, it does not improve your credit score and can lead to higher interest costs. Aim to pay more than the minimum or, ideally, the full balance.

2. Opening Too Many Credit Cards

Each time you apply for a new credit card, your credit score may temporarily drop due to the hard inquiry. Opening multiple credit cards in a short period can be likened to "dating several people simultaneously," creating confusion and negatively impacting your score. Only open new cards when necessary.

3. Maxing Out Your Credit Limit

Using your full credit limit can significantly lower your credit score. Instead, try to keep your utilization ratio low and make multiple payments within a billing cycle if needed to manage your balance.

A credit card like The FIRST from Shinhan Finance is a valuable tool to support both daily expenses and larger financial goals. However, to maximize its benefits and improve your credit score, strategic and mindful usage is essential.

We hope these insights will help you achieve your financial objectives and build a strong credit profile. Start managing your credit card wisely today to secure your financial future!