Credit score today is no more restricted to lenders evaluating the risk of providing you credit or enhancing your existing limit. They are increasingly being used for setting your loan's interest rates and evaluating job applications. If you have a low credit score, or want to improve it, the following tips may help you:
1. Repay EMI and credit card dues on time
Timely repayment of loan EMI and credit card dues help maintain a good credit score. Avoid paying the minimum amount due on outstanding credit card dues, especially when your credit limit is maxed out (CUR is over 40% of the credit limit). Doing so would not only attract heavy finance charges, but also reduce your credit score significantly.
2. Keep credit utilisation ratio (CUR) below 40%
CUR is the proportion of total credit limit utilised by you. Most lenders consider CUR of over 40% as a sign of credit hungriness. On frequently exceeding this limit, credit bureaus may lower your credit score. Hence, if you are constantly breaching this mark, you should either request for credit limit enhancement on your existing credit card or apply for another credit card.
3. Ensure healthy mix of credit
The proportion of your credit mix may also affect your credit score. Borrowers with higher proportion of secured loans are generally preferred by lenders, and hence are scored higher by credit bureaus. In order to ensure healthy credit mix, you should ideally prepay your unsecured loans first. Doing so would increase the proportion of secured loans in your credit profile which would in turn increase your credit score.
4. Avoid applying for credit from multiple lenders directly within a short time span
Every time you apply for loan or credit card, lenders pull out your credit report from the bureau to evaluate your creditworthiness. Such requests are treated as hard inquiries, and credit bureaus can lower your score by a few points. Avoid making multiple credit card or loan inquiries within a short span of time as this can lower your credit score by a huge margin.
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5. Keep your oldest credit card active
Usually lenders prefer lending to those with a longer credit history. The older your active credit card gets, the higher is its average age of credit history. Closing your old credit card can reduce the average age of your credit account, which can have adverse effect on your credit score. In addition to this, it can also reduce your credit limit, leading to increase in your credit utilisation ratio, and eventually pull down your credit score. If you have multiple credit cards and want to close any of them, consider closing relatively newer credit cards instead of the older ones.
6. Monitor guaranteed loan account
Co-signing a loan make you legally responsible for its timely repayment. In case of delinquencies or defaults by the primary borrower, credit score of the guarantor also faces negative impact. Hence, make sure to keep a check on loan accounts where you have signed up as guarantor. Ensuring timely repayment of loans also helps to ameliorate your credit score.
7. Keep close track on add on cards
Both primary and add-on cards have single shared credit limit wherein primary holder is responsible to clear the dues on add on cards. Hence, it is imperative for you to closely monitor expenses incurred on both cards and make sure to contain CUR below 40% mark. Consider setting up sub-limit on your add on card from the primary card to prevent credit limit breaching.
8. Review your credit report periodically
Clerical error or fraudulent credit applications or transactions in your name may lead to a drop in your credit score. Thus, reviewing your credit report periodically helps you detect such errors sooner so that you are able to take urgent steps to rectify the error. You can avail one free credit report annually from each of the four bureaus. This allows you to spread your report requests in such a manner that you can avail one free report every quarter. You can also consider visiting online financial marketplace to pull out your credit report.
(By Radhika Binani, Chief Products Officer, Paisabazaar.com)