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Your credit score has a lot of power when it comes to accomplishing big life milestones, like buying a new car or taking out a mortgage on your first home. Lenders rely heavily on your credit score to decide whether or not to approve you for a new financial product. After all, it works as a key factor for banks and financial institutions while granting you a loan or a credit card.
A credit score is a three-digit numeric number ranging from 300 to 900, and it is assigned to each person who has taken advantage of a credit product, based on their credit/loan behavior over the period. In India, credit history is maintained by RBI approved credit bureaus. Currently, there are 4 credit bureaus in India, namely TU CIBIL, Experian, Equifax and CRIF Highmark. Each of these credit bureaus has its own algorithm for assigning a credit score to each individual.
The score is generated based on an individual’s credit repayment behavior over a period of time. We all need to maintain a healthy credit score because it determines our borrowing capacity. Keep in mind that it is not only potential lenders who use credit scores, but even existing lenders also continue to review your repayment and borrowing behavior and determine whether to proceed with the ease of credit or upgrade or downgrade the credit facility or product. Increasingly, insurance companies are using credit scores as a predictor not only of on-time payments, but also of an individual’s overall financial behavior that increases their level of risk. Other financial institutions and employers also check credit scores to weed out undesirable applicants.
Simple tips to improve your credit score
Pay loan EMIs/credit card bills on time: Your payment history, whether or not you pay your bills on time, has the biggest impact on your credit score. It’s also something lenders pay close attention to when they check your credit report before approving you for a loan or a new credit card.
Never pay only the minimum amount due on credit card bills: In general, you must pay your credit card bills in full or at least pay more than the minimum amount due. Paying the minimum amount due on credit card bills reduces your chances of improving your credit score.
Avoid unnecessary loan/credit card applications: Multiple credit applications in a short period of time from potential lenders, solicited or unsolicited, can actually lower your score. This includes inquiries from mortgage companies every time you get pre-approved for a home loan and applying for a credit card at department stores that give you a 10% discount or asking for unsolicited credit card you receive in the mail. Avoid applying for a loan/credit card until needed.
Keep credit card usage limit below 60-70%: Avoid using your credit card limit as much as possible, as this negatively impacts your credit score. If you happen to use the limit completely, you need to ensure that payment is made in whole or in part to bring the limit utilization down to 60-70%.
Good mix of credit products: Always maintain a good mix of secured (home loan/car loan/two-wheeler loan, etc.) and unsecured (personal loan/credit card/consumer durable, etc.) loans. A good mix improves the chances of having a better credit score. However, having too many unsecured loans should not be preferred.
Regularly review your credit report: One should check his credit report for any misrepresentation made by a lender in the credit report. If in this case there is a discrepancy in commercial loan/credit lines, you can raise the dispute directly with the credit bureau or lender and resolve the issue(s). This practice contributes to the improvement of your office score. It is always recommended to check your credit score well in advance as there is no way to fix the report at the last minute.
Also monitor the loans for which you are a co-borrower or guarantor: If you are a co-applicant or guarantor of a loan where you are not the primary borrower, you should monitor the repayment behavior of these loans, as they can also impact your credit score.
Good credit management leads to higher credit scores, which lowers your borrowing costs. Living within your means, using debt wisely, and paying all your bills, including minimum credit card payments, on time are smart financial moves every time. They help improve your credit score, reduce the amount you pay for the money you borrow, and put more money in your pocket to save and invest.