Keeping your credit score up can seem like a daunting task. Many Indians don't even understand how their credit score is kept track of, especially those who are new to the workforce. Lenders refer to your credit score to assess your potential to pay loans. Hence, it is important to maintain a reasonable credit behaviour with a good repayment track record.
Let’s break down this concept for those who are new to this topic and see how one can improve their credit score.
What is a Credit score?
A credit score is a three-digit number ranging from 300 to 900. Your credit report, which includes your payment history, credit inquiries, number of credit accounts, credit utilisation ratio, and account ages, is the basis for the calculation. A score between 750 and 900 is regarded as healthy, while one between 300 and 600 is considered poor or low.
A healthy credit score will increase your chance of getting a loan and will also empower you to negotiate better loan terms whereas a poor credit score can make it difficult for you to get a loan and if you do get one, you will have to settle for higher interest rates.
Here are some tips on how you can improve your credit score:
1. Keep a check on your credit report:
If you haven't taken any loan in the past years, that doesn't mean you have a good credit score; rather if there is no data to track the credit behaviour of the customer, the credit score in such cases tend to be on the lower side. Monitoring credit score on a regular basis can help you keep a good track of errors. Every time a lender or financial institution checks your credit score, CIBIL or CRIF may be deducted a few points because they view this as a sign that you are attempting to borrow more money. Checking your own score, on the other hand, does not affect it.
2. Be disciplined about paying off your dues on time:
One of the most effective ways to maintain a good credit score is by timely paying off your dues. If you’re unsure about your ability to pay these in a timely manner, reduce your credit usage.
3. Minimise hard enquiries:
The lender or issuing company will check your credit report while considering your application when you apply for a loan or credit card. A hard enquiry is what is referred to as the lender's request for a credit report. Multiple hard inquiries can give the impression that you are credit-hungry and lower your credit score. Avoid applying for multiple credit lines if you're trying to raise your credit score.
4. Elongate your good debt:
You might be in a position where you can quickly pay off a loan in full or even make a significant purchase without taking out a loan. Your credit score is not aided by this, though. Even though the RBI has mandated that early loan closures be legal and free, doing so can lower your credit score because it reduces the amount of credit you have open. Keep making on-time loan payments unless you're switching to a loan with a more reasonable interest rate.
