Credit score checks are on the rise. As per the BankBazaar Moneymood 2020 report, we saw a 111% increase in credit checks year-on-year in 2019. Your credit score is a numerical representation of your creditworthiness and mentioned as a number ranging between 300 and 900. It is computed by assessing your long-term use of loans and credit cards. If you’ve been timely with your EMIs and card payments, expect to have a good score.
Your credit score, along with your credit history, is mentioned and explained in your credit report, which you can avail for free online. Just Google for “free credit score check” and get your report in a few minutes. It’s become fairly important to be on top of your credit score. A good score – 750-900 – can help you avail the best loan and credit card offers, and also enjoy preferential interest rates.
In 2019, the Reserve Bank of India mandated banks to link their loan interest rates to external benchmarks such as the repo rate, and also provided them the freedom to reset interest rates for customers as per their changing credit risks. This basically means that there’s a clear incentive for borrowers to be aware of their credit score and ensure it remains in the “high zone”, because not doing so would mean having to pay higher interest rates.
Here are a few ways you can boost your credit score and inch it towards 900.
Always Pay Dues On Time
This will be the biggest contributor to a healthy credit score. Always pay your EMIs in the month they’re due and always be on time with your credit card payments. The more you do this, the higher your score will become over time. Be especially careful with credit card debt, because it is unsecured debt, and even one late payment can dent your score. Automate your EMIs and credit card payments so that you’re always on time. Late payments will not only attract penalties but will continue to show on your credit history for the long term.
Maintain Low CUR On Credit Cards
CUR – Credit Utilisation Ratio – is the percentage of credit available to you that you’re using. For example, if your card spending limit is Rs. 1 lakh, and you’re spending Rs. 50,000 in a month, your CUR will be 50%. It would be ideal to keep your CUR to around 20-30% because it has a significant impact on the computation of your credit score.
Maintain Credit Lines, If you Can
The older your credit line, the better for your credit score. If you’ve held on to a credit card for ages, or if your home loan is several years old, it reflects positively on you. You’ll only be able to have a long-aged credit line if you’re timely with your payments. Therefore, maintain your credit lines as long as you can. If you close an old credit card account, it may hurt your credit score a little bit.
Don’t Settle A Loan
Pre-closing a loan will normally have a positive impact on your credit score. However, beware of the settlement option. A settlement happens when your principal and interest payments are overdue, and your lender offers you the option to part-pay your dues (typically the principal) and consider the loan closed. This option should be exercised only when you’re in no position to raise any kind of money to pay your loan. However, if exercised, the option will reflect in your credit report for the long term as your inability to fully repay your loan. This will hurt your score and it will also make it difficult for you to get new lines of credit in the future.
Check Your Report Frequently
If you have used a credit card or taken a loan, you should track your credit score frequently – ideally once a quarter, if not more. It would also help you stay on top of potentially costly errors in the report which may bring your score down. If you spot errors, you could report them to the credit bureau, and they can take it up with the lender for correction.
If you have never borrowed or taken a credit card, you may not have a credit score yet. You could initiate a credit history by taking your first credit card. If your income is irregular, you could take the credit card against a fixed deposit. Using the card for small transactions and repaying them on time over a few months will kick off your credit history, which can then help you get further credit like a car loan or home loan when you need one in the future.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.