Credit score: What is it, how to check yours and tips to improve

In the past few years, we have seen numerous TV commercials talking about easy loans, EMIs and more but what most of these advertisements don't reveal is that most of the things related to money lending or credit are based on credit scores.

The term credit score is now quite a popular financial term thanks to the new apps that keep you updated from time to time. But what is a credit score and just like any other score why should it be as high as possible? Here're the answers to your questions.

What is a credit score? 

A person's creditworthiness, or capacity to pay back debt, is determined by their credit score. Typically, it is expressed as a number based on the individual's credit history and payback records across various loan kinds and credit institutions. A credit rating is another name for a credit score. 

Why a high credit score is necessary 

A CIBIL credit score of 750 or more is regarded as good. Banks and other lending organizations use credit ratings to determine your creditworthiness.  Your chances of having a loan authorized are higher the higher your credit score.

Additionally, it's possible that you'll benefit from reduced interest rates, better terms for repayment, and a quicker loan approval process. 

Indian credit ratings 

The Reserve Bank of India has granted licences to four credit information companies in India. These include Experian, Equifax, Highmark, and Credit Information Bureau (India) Limited (CIBIL).

The CIBIL rating is the most widely used credit score in India.

A three-digit figure, the CIBIL credit score goes from 300 to 900, with 900 being the highest score. 

Calculation of credit scores 

An algorithm that considers several elements determines your credit score.

The following are some of the considerations: 

* Your credit history for all types of debt (such as loans and credit cards) 

* Your overall credit limit 

*  The proportion of secured vs unsecured loans 

* How many credit cards and loans you have 

* Utilizing credit 

How to check your credit rating 

Before requesting a loan or credit card, it is ideal to check your credit score. Visit the website of the credit rating company and submit an online request to acquire your credit score. 

How to Improve or Raise Credit Score: 

There are various methods you can use to raise your credit score. Here are a few of them:

1. Check your credit report. 

Checking your credit report is one of the crucial things you must do to raise your credit score. This will assist you in finding mistakes in your report. If you discover errors in your report, you must have them fixed right away. You must make sure that the credit report is accurate because it serves as the basis for calculating the credit score. 

2. Pay any unpaid bills. 

To fix or somewhat raise your credit score, you must pay off any unpaid credit card bills or loans right away. One of the elements taken into account while determining credit scores is payment history. Your score will be poor if you have a history of late payments, and vice versa. To make sure you always pay your credit bills or EMIs on time, it is a good idea to activate payment notifications or auto debit options. Avoid always paying the minimum amount due on your credit card because doing so will raise the total still owed. To keep the balance on the bill low, try to pay the entire amount. 

3. Credit Usage 

It is yet another important component that is taken into account when determining credit score. Your dependence on credit is demonstrated by how much credit you have accessible compared to how much of it you are actually using. The recommended credit utilization rate is under 30%. Keep an eye on how much of your available credit you are using if you have several credit cards. Additionally, look for a credit card company that permits numerous monthly payments. 

4. Avoid deleting outdated accounts from the report.

In order to improve the quality of their credit reports, some people have a tendency to delete outdated accounts, inactive accounts, or accounts with a bad history. Even after paying their debts, some people attempt to have them taken off of their credit records. This may not be the best course of action. Negative things are undoubtedly harmful for the score, but they are eventually automatically removed from the credit record. Getting old accounts deleted could significantly lower your score because they might have a solid history of payments. Additionally, if you have paid off your debts, you should maintain them on file because doing so can raise your credit score and show your creditworthiness.

5. Make a credit plan 

Many people whose scores drop sharply have poor financial planning. If you apply for too many credit cards to raise your credit limit but are unable to pay off the balances of each one on time, you will end up with a sizable outstanding balance and a history of late payments, both of which will significantly lower your credit score. Furthermore, applying for unplanned loans could put you in a dire financial situation if you are unable to pay them back. It is crucial to plan your credit and only apply for a credit card or loan when absolutely necessary and when you are certain that you will be able to pay back the money you borrow. 

6. Debt consolidation 

You might be able to take advantage of this if you have excessive debt. A bank or credit union may provide you a loan for debt consolidation. Then you can just settle the debt. There will be just one payment required of you. Remember that you can reduce your loan's interest rate and pay off your debt sooner.

A debt transfer is another option for consolidating numerous credit card accounts. During a promotional period, some cards frequently charge no interest on the balance on your card. The balance transfer fee, though, can run you anywhere from 3% to 5% of your total.