Credit score represents your creditworthiness. It is determined by your credit files – loans, debts, repayments, missed payments, number of loans and credit cards in your name and such other factors. The maximum score you can receive is 900. A score of 750 and above is considered to be excellent and puts you in a ‘low-risk’ bracket to be eligible for a loan. The score can fluctuate depending upon your monetary choices. You can always work towards achieving a good score and maintaining it.
Importance of a Good Credit Score
- Your eligibility for getting a loan increases as your high score indicates that you are a low risk borrower.
- You get lower rate of interest which reduces your EMI and a lower EMI means lesser monthly financial burden.
- It takes a long time to improve a bad score. Even a single missed payment could cost you big in the form of a higher rate of interest and difficulty in getting a loan. So, it is better to maintain a good score at all time.
- Credit records are permanent and show your financial past. It is wise to have clean record.
- It increases your chances of credit card approval with a high limit and low interest.
Ways to Improve your Credit Score
- Have recurring digital calendar reminders to remind you to pay your bills on time. You can also maintain a diary or a log, especially for your financial transactions and keep a track for making payments. Delayed payments not only result in late fees, but can adversely affect your credit score, too.
- Using credit card responsibly is, perhaps, the most essential yet most under-utilised way of improving your credit score. You can start building a good credit history by:
a.) Apply for a small loan, even though you might not need one, and pay it back on time with full interest. Do this when you have no credit history and want to build one.
b.) Set up a savings account to pay off your credit card bills. Activate direct debit for all your transactions so you do not miss payments. Check the savings account each month for sufficient funds.
c) Prevent credit card debt by avoiding maxing out.
d.) Do not use your credit card beyond 30% of your credit limit. The smaller the used to unused ratio, the better it will be for your credit rating. If you use it over 30%, pay all bills on time and have a clean record, it could still affect your score. This is because some lenders might consider the balance on your statement to report to the credit reporting bureau.
e.) Pay off all the small balances instead of putting them off. In case of multiple cards, once you have paid off all the smaller balances, use only one or two good cards. Good cards are those which you have been using for a long time and which have no missed payments and defaults on it.
3. Do not delete or attempt to remove old debt from your credit report. It is the kind of debt that is good for yourscore as it showed that you paid the debt as agreed. Also, the longer back in time the debt, the better it is for your score because lenders prefer to see a long standing good report than a good credit report for a shorter duration. It deems your profile reliable, low risk, and worthy of future credit.
- When choosing a loan offer, be realistic and choose the one that best suits your repayment capacity. Also, ideally, choose the financial institution that allows pre-payment, lower interest rate and suitable tenure.
- Negotiate for a lower rate of interest on any loan.
- Check your credit report once every year and rectify any errors immediately.
- If you are overdue, try not to escape the company calls. Request for a payment plan rather than have collection agencies knocking on your door.
- Do not apply for multiple loans/ credits at the same time.
- Even if you want to save for some purchase, do not fault in your repayments such as paying less or missing payments. These instantly bring your credit score down.
- Don’t obsess about your score. Simply keep a yearly tab and rest of the year, pay bills on time and use credit card responsibly.
- Keep low ratios:
a.) Low debt to income ratio (significantly lesser EMI than monthly income)
b.) Low used to unused credit card ratio (higher outstanding balance compared to the total available limit)
- Don’t close old accounts as it decreases the length of your credit history. The longer the credit history, the better it is for your score.
- Maintain accounts in your own name. Also, do not allow someone to use your name for purchasing something on credit, even if the EMI payment goes out of their account.