A person’s credit score is like a key that open the doors to various financial opportunities/facilities available in the market. A good credit score can help us to achieve our goals like buying a dream house, buying a new car or to avail a loan for our business.
What is a Credit score?
A credit score is a three digit number that showcases a person’s creditworthiness. It’s calculated based on several factors, such as one’s payment history, credit utilization, length of credit history, types of credit accounts, and new credit inquiries. A bank or a financial institution usually checks the credit score of a person who has approached them for a loan. A higher score enables a person to avail the credit on better interest rates than a person with a relatively low score.
The credit score of a person can be enhanced in the following ways:
Regular review of Credit Report
We can start improving our credit score by regularly checking our credit report. A credit report issued by the credit bureaus in India such as CIBIL or Experion can be availed periodically by any person interested in knowing his score. The report should be checked for any errors, like incorrect account details or late payments. If any inaccuracies are found, it should be reported immediately to the bureau for rectification. This will give a clear view of the credit history and the financial behaviour of a person.
Timely Payments
A person’s payment history is a crucial factor in determining his or her credit score. Paying the bills on time, whether it’s the credit card dues, loan, or utility bills, shows the lender that the borrower is reliable. One can set up automatic payments or reminders to avoid missing due dates and maintain a clean payment record. Outstanding loan dues should be settled over a period of time by going in for One Time Settlement(OTS) with the lenders.
Managing Credit Card limits
Credit utilization in a credit card is the amount of credit that one is using compared to the total credit limit available to him. It’s best to keep this ratio below 30%. For eg; if one has a credit limit of Rs.1,00,000 available to him, he should try to not have more than Rs. 30,000 as outstanding at any point of time. Lower utilization of the credit limit would imply responsible credit management.
Credit Limit Increase
We can consider asking the credit card company for an increase in the credit limits. If we have a good payment history and can handle additional credit responsibly, a higher limit can lower our credit utilization ratio which will have a positive impact on our score.
Keep Old Accounts Open
The period of one’s credit history also matters. Closing old accounts can reduce the average age of accounts, potentially lowering one’s score. Also, even if we have not been using old credit cards, keeping it open can help show a longer credit history and positively influence our score.
Diversification of Credit
Having a mix of different credit types, like Credit Cards, a Mortgage loan, or a Car loan, can positively impact our credit score. However, one should be cautious and avoid opening multiple new accounts just for the sake of diversifying. One should only take on a credit that he or she needs and can manage responsibly.
Avoid multiple Credit applications
Every time a person apply for a new loan or credit, an inquiry is automatically recorded on his credit report, potentially lowering his score temporarily. Therefore, one should avoid making multiple inquiries within a short period simultaneously as it might signal a financial crisis or risk to lenders.
Exercise Patience and Consistency
Since it takes time to improve the credit score, one should be patient and consistent in his efforts. A prudent and responsible financial behaviour over a period of time would positively influence one’s credit score.
Seek expert assistance
If someone finds it difficult to manage his credit score, he can seek assistance from a Credit Counselling agency or a Financial consultant. There are numerous agencies who assist persons in improving their credit score. They can provide guidance on improving their financial situation and managing their debt effectively.
Enhancing one’s credit score is like a journey. By understanding the factors influencing one’s credit score and by taking proactive steps, one can positively impact their creditworthiness. Regularly monitoring their credit report, paying bills on time, maintaining low credit utilization, and making sound financial decisions will lead to a better credit score over time. This, in turn, would open the doors to better financial opportunities and a more secure financial future.