Credit Score plays an important role when applying for a credit card or loan. It is a three-digit number that reveals an individual's creditworthiness to banks and other financial institutions. It gives lenders an insight into how responsibly you use credit. The better your score, the more the chances of being approved for new lines of credit or new loans. A higher credit score may also open the door to the lowest available interest rates when you borrow.
Credit Score is calculated using your credit history, which contains your payments history, number of loans or credit cards you use, etc. There are four major Credit Information Companies in India, namely CIBIL, Experian, Equifax and Highmark.
A good credit or also known as cibil score, raises your odds of a credit card or getting a loan, while a low score ruins them. Banks prefer not to give loans or credit cards to people with low scores as they do not trust them with their money. To prevent this, you should improve your credit score. But how? There are several measures that you can take to deal with this. Let's take a look.
One of the most important things to improve your credit score is regularly checking your credit report. Doing this will help you identify errors in your report. If you find any mistakes in your report, you must immediately rectify them. Since credit score is calculated based on the information mentioned in the credit report, it is crucial for you to ensure that this report is free of errors. Many banks offer free credit monitoring to their customers; check with yours to see if you can enlist in the service and get alerts whenever your score changes.
Any outstanding bills that you have, card bills or loans, you must pay them off immediately to repair or improve your score. Payment history is one of the factors taken into consideration while calculating the credit score. If you have an account of delayed payments, your score will be low and vice-versa. It is a brilliant idea to activate payment alerts or auto-debit facilities to ensure that you are consistent with your bill payments or EMIs on time. You should also avoid paying only the minimum amount due on your credit card, as it will increase your card's outstanding balance. Try to pay the entire bill to keep the exceptional amount low.
Another major factor considered while calculating a credit score is credit utilization. The amount of available credit vs how much of it you are using shows your dependency on credit money. It's better to keep the credit utilization below 30%.
Therefore, if you have numerous credit cards, keep a regular check on how much money you are using off of credit. Also, try to find a credit card issuer who accepts multiple payments monthly.
Often people whose scores fall drastically do not plan their finances well. If you apply for several credit cards to increase your credit limit but cannot pay the bills off when due on all of them, you will be left with a substantial outstanding balance and a history of due/delayed payments that will impact your score lot. Also, applying for unplanned loans might leave you in an awful financial state if you cannot repay them. Hence, it is crucial to plan credit and apply for a credit card/loan only if necessary and when you are sure that you will repay the amount you borrow.
You cannot repair credit scores in a day. There is no specific number of points by which your credit score might improve every month, and neither is there a particular number of points that each action will gain. The amount of time it takes to improve your credit depends on why your credit score is low. It requires time, patience and planning. Once your credit score improves, try not to repeat any actions that set it back before. If you do not have a credit score, try to build it by applying for a regular or secured credit card.
People tend to remove old accounts or accounts with adverse history from their credit reports to make them look good. Some may even try to remove their old debts from their reports once they pay them off. This may not be a very brilliant thing to do. Yes, adverse history is bad for the score, but these accounts are automatically removed from the credit report after a while. Getting old accounts removed yourself may harm your score as they may have a good repayment history. Also, when you have paid your debts, you should keep them in your report because they will improve your score and show your creditworthiness.
Don't close them if you have old credit accounts that you're not using. The older your average credit age is, the more favorably you appear to lenders.
And if you have delinquent accounts, take action to resolve them. For instance, if you have an account with multiple late or missed payments, get caught up on all that's due, then work out a plan to make future payments on time. This won't erase the late fees but can improve payment history in the future.
If you have charge-offs or collection accounts, decide whether it makes sense to pay off those accounts in full or offer the creditor a settlement.
There are two kinds of inquiries that one can perform into your credit history- a soft and a hard inquiry.
A typical soft inquiry includes checking your credit or a potential employer looking through it or any checks carried out by financial institutions you already do business with. Soft inquiries do not affect your credit score.
A hard inquiry is when you apply for a credit card, mortgage, auto loan, or another new credit form. Occasional hard inquiries that occur once in a while will not affect your credit score. However, many of these in a short period tends to affect your credit score. This often declines your creditworthiness with banks, and you seem like a more significant risk.
If you have too many debts, you could use this to your benefit and take out a debt consolidation loan from your bank and pay off all of them. You will only have to make one payment to deal with, and, if you're can get a lower interest rate on loan, you'll be able to pay down your debt faster. This will enhance your credit utilization ratio and, in turn, improve your credit score.
The bottom line is that improving your credit score is an excellent goal to have, especially if you're planning to apply for a loan to make a significant purchase like a new home or a car. It may take time, several weeks, and sometimes several months, to see a visible impact on the score when you start taking steps towards improvement but the sooner you begin working to improve your credit, the sooner you will see results.