How to improve your credit score?
We live in a world where everyone has enormous goals, and we all need money to fulfil those dreams. Because not everyone is fortunate enough to have inherent financial resources, the next best choice is to take out a loan. You’ll need a solid credit score to acquire a hassle-free loan. Before sanctioning a loan, banks are required to verify an individual’s credit score. Banks reward customers with high CIBIL scores with attractive loan rates. Whether you’re starting from scratch or repairing your credit after a setback, it’s critical to understand how credit scores are calculated and how to improve them.
What is a CIBIL score?
The Credit Information Bureau (India) Ltd, better known as CIBIL, is India’s first credit information company. A CIBIL score is a 3-digit number ranging between 300 and 900 that represents an individual’s creditworthiness. A credit score of 750 or higher is considered to be good or satisfactory. The better the CIBIL score, the better the interest rates. As per CIBIL’s website, 79% of loans are approved for consumers with a CIBIL score of 750 or higher. Your CIBIL score depends on various factors like credit payment history, credit utilization ratio, the total number of accounts, the length of your credit history, etc.
Credit bureaus are organisations that collect information from a variety of sources, such as debtors, creditors, and collection agencies. and keep track of individual credit information. They calculate your CIBIL scores and maintain a record of every individual’s credit details.
The following are the major credit bureaus in India:
- TransUnion CIBIL
- CRIF Highmark
How is your CIBIL Score calculated?
While calculating CIBIL scores, there are different factors are taken into consideration. And these factors are given different weights. So, there are mainly four factors which are considered:
Your payment history plays a major role when it comes to your CIBIL score. If you pay all your bills on time, it will improve your score. However, if you miss or delay any payments, it will reduce your credit score. So, always try to make your due payments on time to see a positive impact on your score.
The credit utilisation ratio refers to how much credit you use in relation to your available credit limit. It is suggested that you should only use 30% of your total credit card limit to maintain a healthy credit score. If you frequently use credit, it indicates that you are overly reliant on credit. As a result of excessive credit usage on your credit cards, lenders may believe you are at high risk of becoming a defaulter, resulting in application rejection.
Your credit mix is the percentage of secured and unsecured credit from various lenders. Excess unsecured credit like personal loans and credit cards can be a red flag and lower your credit score. Your borrowing history, whether secured or unsecured, gives lenders insight into your ability to manage various types of debt. To build a solid credit history, you should have a good balance or mix of secured and unsecured credit.
Lenders will conduct a hard inquiry into your credit history whenever you apply for a new credit. Multiple inquiries portray you as desperate for credit. Naturally, a few inquiries are not detrimental to your CIBIL score; however, too many inquiries in a short period of time will significantly lower your CIBIL score.
The above-mentioned factors have different weightage:
Even if your CIBIL score is low, there are numerous strategies to raise it. Let’s have a look-
Ways to improve your credit score
1. Make your payments on time-
Your payment history is one of the most important factors in maintaining your credit score. And to achieve an excellent CIBIL score, you’ve got to make your payments on time. Attractive credit card offers may increase your spending limitations, leaving you unable to pay your bills on time. Limit your impulsive purchases and try to keep track of your spending. Make sure to not miss any debt or loan payments; failing to do so may result in late payment fees and taxes.
2. Avoid taking on too much debt at once-
Maintain a solid credit score by repaying your existing debt and then taking out another. If you take out numerous loans at the same time, it will appear that you do not have the money to repay them all. As a result, always aim to pay off your present debts before taking out a new loan.
3. Set a reminder to be disciplined-
CIBIL considers the timely payment of your debt, so it is essential to be disciplined when it comes to paying EMIs. Set a reminder for 4-5 days before the due date. Any delay in payment may lead to a penalty, which may result in a lowering of your credit score. Your credit score might improve if you routinely pay your bills on time.
4. Check your credit report regularly-
You should evaluate your credit report regularly to see if there are any discrepancies in your report. When it comes to updating your data, CIBIL may make mistakes, causing delays in the recording of information such as your name, PAN card number, and so on. If you find any mistakes, contact CIBIL or your bank for assistance. These errors are commonly seen, which may result in a low credit score.
5. Monitor your credit utilization ratio-
Try to limit your use of credit cards. You don’t need to use your credit card limit entirely. Keep your credit utilization limit within 30% every month. For instance, if your monthly credit card limit is Rs 150,000, you should not spend more than 30%, i.e., Rs 45,000 through your credit card. A high credit utilization ratio may negatively impact your credit score.
6. Ensure a healthy credit mix-
Maintain a good mix of secured loans (such as home loans and auto loans) and unsecured loans (such as personal loans). Credit bureaus give more attention to secured loans. Having too many unsecured loans may hurt your credit score, so try to strike a balance between the two.
7. Keep the old credit cards operational-
You might be tempted to close the old credit cards as soon as you get the new ones. However, it is recommended that you keep all the credit cards you own. The older the credit card, the more favourable it is for the lender. Good repayment history helps you improve your credit score.
8. Don’t be a joint account holder-
Even if you haven’t done anything wrong, being in a joint holder account can cause you problems. You need to pay attention to your joint applicant’s spending habits because if they default on any payment, you will be equally liable. Their mistakes may negatively impact your credit score.
9. Increase your credit limit-
Increasing your spending limit does not imply that you must spend more. There’s a trick: increasing your credit limit lowers your credit utilisation, resulting in a higher credit score. Your credit history and score will be harmed if you use your credit card excessively.
A credit score of nearly 900 makes it much easier to get your loan approved. It takes a little time to build a good credit score. It could take anything from 6 to 12 months to boost your credit score. You must cultivate strong long-term credit practices, pay all outstanding bills on time, avoid debt accumulation, and be patient.