Credit score is not just a number but is a reflection of your financial health and creditworthiness. Having no or low credit score can mean loan denial when faced by a pressing need for funds. On the other hand, if you have a score over 750, banks and lending institutions will reserve the best loan offers for you. By taking small but significant steps, you can not only maintain a healthy credit history but also slowly improve your credit score in the long run. Here are 11 simple ways in which you can get there and live a financially disciplined life.
Develop A Credit History
You need not be afraid of credit. To reveal your creditworthiness, you must have a history of timely repayment of previous credits. A long-term history of such repayments reflects upon your long-term financial robustness. Check if you have an existing credit score, and if not, apply for a credit card or a loan to initiate your credit history. The only thing as bad as having a low credit score is having no credit score.
Make Timely Repayments—Always
The most important point—and also the easiest way to improve your credit score is to always make timely repayments. Be it your credit card dues or your loan EMIs, always pay on time. Late payments can reduce your score. Opt for auto-debit option to ensure your dues get automatically deducted from your bank account to ensure timely repayments. Not repaying credit on time means paying higher interest, damaging your credit history, and risking losing the opportunity to acquire further credit.
Keep A Tab On Credit Score
When was the last time you checked your credit score? Usually people do not bother about their credit score till they are in need of a loan. But if your credit score check provides an adverse finding during your loan application, you may be denied the loan, or be provided a loan at a high interest rate. At that stage, it would be too late to attempt to fix a poor credit score. Fixing it requires time and effort. Therefore, check your credit score periodically, know what it is, fix it if it’s on the lower side, and go into your loan application with confidence.
Have A Mix Of Credits
Your credit score is made up of various parameters including credit usage, type of credit, enquiries made into your credit history, etc. Ensure that you engage with lenders on all the financial parameters that make up your credit score but in a balanced manner. From credit cards to automobile loans to longer tenure home loans to credit limit for business, diversify your credit utilization as far as possible.
Make Optimal Use Of Credit Limits
Maintain a healthy credit utilization ratio, which is a ratio of available credit to used credit. Strive to ensure your credit utilization ratio remains below a threshold of 30% to maintain your credit score in a healthy state. For example, if you have a credit limit of Rs. 50,000 on your card and you are using Rs. 35,000 each month, your credit utilization ratio is as high as 70%, which will impact your credit score negatively.
Think Twice Before Closing Credit Cards
For someone having multiple credit cards, closing one card may appear to be a good thing. While controlled use of credit is a good thing and prevents unnecessary expenditure, getting rid of a card may mean a steep rise in your credit utilization ratio. For example, you have two credit cards each with a spending limit of Rs. 50,000, implying a total credit availability of Rs. 100,000. Your total card use per month is Rs. 20,000, implying a credit utilization ratio of 20%. But if you get rid of one card, the ratio rises to 40%, and this will hurt your credit score. Therefore, maintaining balanced use of credit between multiple cards is not a bad thing at all.
Don’t Make Too Many Loan Applications Together
With every loan or credit card you apply for, your lending bank or NBFC will check on your credit score. With each application and credit history check, your credit score will lower marginally. The more your applications in a short period of time, the higher the negative impact on your score. It’s best to spread out your loan applications over a longer period of time so as to not appear credit-hungry.
Don’t Settle For Minimum Payments
As a thumb rule, ensure you settle your credit card bills in the full and not settle for paying the minimum amount due. Always try to repay your credit card dues in full and on time. This is because credit cards have a high annualised rate of interest – sometimes 40-50% on some cards. Having a big credit card balance will pull you into a debt spiral.
Avoid Going For Loan Settlements
When you default on a loan payment, your lender may provide you the option of a loan settlement, wherein you make a one-time payment on your principal and interest outstanding. For example, you have an outstanding of Rs. 1 lakh, but you get a settlement option of Rs. 40,000. If you decide to settle, it will reflect in your credit history for several years and will also reduce your credit score. Avoid settlements, and always attempt to pay your loans in full.
If Rejected, Don’t Keep Seeking Loans
When applying for any loan, read the terms and conditions carefully and check your eligibility criteria. If you are denied the loan for any reason, don’t keep applying for fresh loans and instead determine the reasons for rejection. If you keep trying to apply for loans, subsequent credit checks would drive your credit score further down, and the fact that you had been rejected by another lender could lead to more rejections.
Build Creditworthiness On Social Media
New-age credit rating agencies are tapping into alternative data points to assess the creditworthiness of borrowers. For those borrowers who may not have a credit history, a good social media presence could prove helpful. A social media presence would provide a basis for the assessment of the borrower’s profile and make it easier for them to obtain a loan.
The writer is CEO, BankBazaar.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.