The higher one’s credit score, the better chances individuals have of getting loan approval. More importantly, high credit scores can help you obtain a low-interest rate because the lender can feel assured of your timely repayment, of which your good credit score is proof.
On the other hand, getting approval on a loan with a low credit score can be massively difficult. Often, the only way one can land a loan even with a low credit score is through exorbitant interest rates. This can further worsen your financial troubles and land you in more outstanding debt.
A good credit score should therefore be treated with great importance. Upon implementation of the following instructions, you are sure to see a gradual change in your credit score.
What is a Credit Score?
A credit score, calculated based on your credit report information, is a three-digit numerical expression that determines your creditworthiness. This number gives an impression of your credit transactions to approximate whether you are a responsible borrower.
In India, four major credit bureaus formulate the credit scores of individuals- TransUnion CIBIL, Experian, Equifax, and Highmark.
The credit score in your credit report ranges from 300 to 900. A score between 300-549 is considered low, while a score between 550-700 is moderate.
In India, the minimum credit score requirement to obtain a loan is 750. If your credit score is unfortunately below 750, you might find it challenging to get approval on loans. Follow the instructions given below to get a head start on improving your credit score:
What is the Best Way to Improve Your Credit Score?
There is no better way to improve your credit score than to pay your bills on time. This simple task of paying off your debts within the stipulated time is sure to improve your credit score. Whether it is an EMI or a credit card bill payment, paying your debts responsibly and on time will guarantee a standard credit score in no time.
We have also listed some additional strategies that you can adopt to improve your credit score.
Repayment history is the most crucial factor that goes into determining your credit score, but there are other pointers you should also keep in mind that can prove useful in scaling up your credit score:
Review your Credit Report
Your credit report is a document providing a detailed summary of your credit history.
Your personal information, financial dealings, and repayment history are collated to create a unique credit report that gives an impression of your credit history.
It breaks down all relevant information about your credit card balances, credit limits, number of current accounts, outstanding debts, etc.
It is essential to review this report from time to time to keep track of your credit dealings. It also gives you scope for improving your credit score. Reviewing credit reports can also help rectify any error in the information. Raising a dispute to resolve the error can consequently improve your credit score in no time.
Credit bureaus issue credit reports annually. Besides that, you can apply to view the credit report at any other time through purely digital means without any hassle.
Pay Outstanding Debts Immediately
Clearing outstanding debts and credit card bills are of foremost importance to start your journey towards a good credit score.
Payment history is one of one the most critical factors that determine the credit score. If you have a history of delayed repayments, your credit score is bound to be low. In the same way, the reverse will shoot up your credit score drastically.
Pay your EMIs and credit card bills on time without fail. To be more prompt in this respect, set up payment alerts or activate an auto-debit facility to ensure smooth auto-transaction without intervention from your end.
Strategic Credit Utilization
Credit utilization is the portion of your total credit limit that you are using at a given time.
An excellent rule of thumb is to use not more than 30% of the credit limit on your card to keep intact a good credit score.
Individuals with the highest credit scores utilize 7% or less of their credit limit. This will lead to a low credit balance which will directly feature as a factor in calculating your credit score.
Another way to get a low credit balance is to pay down the outstanding amount before the billing period or to make several payments periodically throughout the month to prevent your credit balance from exceeding a certain lower limit. Remember, the lower your credit balance, the better.
Opting for Higher Credit Limits
Another way to maintain a low credit balance is to ask your bank or credit union for a higher credit limit. If your balance remains the same, a higher credit limit will render a lower credit utilization, which will subsequently improve your credit score.
It might be easier to appeal for a higher credit limit if you have a long-running relationship with your credit union or current bank. If your income has shot up, you will be more likely to get approval. With the whole process being digital, application and approval on a higher limit can be quickly obtained.
Do not Remove or Shut Down Old Accounts
Among the several factors that determine your credit score is the age of credit accounts. The longer you have had credit accounts, the more favorably inclined you will be to the lender.
Most individuals make a common mistake to close down old credit accounts that they might not be currently using. Closing credit cards with available balances on them can increase your credit utilization by lowering your available credit.
Additionally, do not remove old or deactivated accounts from reports, even if they display negative repayment history. If you paid off these very debts, showing them in your report might fetch you a good impression.
Moreover, the collective age of the accounts establishes your credit age, which is an important measure of your credit score.
Limit the Hard Inquiries on your Credit History
There are two kinds of inquiries that can be made into your credit history- a soft inquiry and a hard inquiry.
A soft inquiry is a credit inquiry made by the credit account holder themselves or an inquiry made by a potential employer or a bank or financial institution with whom you share prior business relations. Such an inquiry has no bearing on your credit score.
However, the other type of inquiry, called a hard inquiry, can adversely affect your credit score.
Hard inquiries are formal inquiries made into your credit history by the lender when you apply for a mortgage, auto loan, credit card, or any other form of credit.
Hard inquiries that are not frequent will not have any impact on your credit score. But if hard inquiries are frequently carried out within a short span of time, banks will interpret this as a financial crisis on your end.
They will think that you often need funds because you are in financial trouble, compromising your creditworthiness as a borrower. Therefore, if you have been applying for loans frequently to reorder your finances, you might have been on the wrong track.
Taking a Debt Consolidation Loan
A debt consolidation loan is a loan plan taken to consolidate outstanding debts. If you are in a financial crisis swamped in debts, you can take on one loan with the sole purpose of paying down existing loans.
Debt consolidation loans may be available at low-interest rates, enabling you to pay off the loan faster. This can improve your credit utilization ratio and, subsequently, your credit score. Your known bank or credit union can help you get a debt consolidation loan faster and at more affordable interest rates.
A balance transfer credit card serves the same purpose as a consolidation credit card to pay off balances across multiple cards. Some cards offer a promotional period during which no interest will be levied on your balance.
However, a certain transfer fee is charged, which might amount to 3-5% of the amount transferred. Be sure to iron out all such potential costs before making a decision.
Be sure to carefully glance through your credit report at the next immediate opportunity to get an idea about the changes you can make to improve your credit score.