How can improve your Credit Score?
The Credit Score given by tge Credit Information Bureau Limited (CIBIL) is one of the most important factors for determining whether or not your loan will be approved. CIBIL scores are generated depending on your credit history that includes past credit taken and the payment pattern. A high score, usually more than 750, means strong creditworthiness. A low score (less than 350) may brand you as a risky customer and lenders would hesitate to approve your loan.
Unfortunately, most people are not bothered about a good Credit score, until their loan applications are rejected by the bank. People are often surprised by it and wonder how to improve their credit worthiness. But fixing a credit reputation takes time and effort and there is no quick-fix solution.
Here are some ways through which you can better your credit score:
Check your credit report
Repairing your Credit score begins with your credit report. First, get a copy of the report and check for errors. Particularly check whether there are any late payment charges erroneously levied against your accounts. Also, ensure that all amounts you owe for each of the open accounts are correct. Resolve the errors immediately. Call up the reporting agency and the credit bureau or shoot an email asking for a clarification.
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Pay bills regularly
Most people are still unaware that simply paying the outstanding bills on time—even telephone and electricity bills—can play a major role to improve the credit score. Payment regularity, on your credit health report, comprises almost 35% of the total score. And who doesn’t know, prevention is always better than cure. Thus, it’s important that you regularly pay your utility bills. A “no late payment” status for at last seven years is advisable to get a healthy score.
Square off debts
An easy method for improving your credit score is to start paying off old debts and loans. Make timely payments to get rid of your dues, even if the debt amount is small. Minimizing outstanding debt always helps.
Less number of credit cards
While having a credit card actually helps you to become eligible for loans, owning numerous cards and making huge purchases can reverse the situation. A bad credit score can be reduced by not using credit cards in the first place and avoiding more number of cards than you actually need. Try to limit your expense between 10-20% of your total credit limit. In that way, you can keep your repayments under control.
Also read: All that you wanted to know about your Credit Score
No card defaults and new purchases
An important measure for improving your credit rating is to pay down all your credit cards and avoid defaults. As a thumb rule, try making the balance of each card that you hold, at least 30% below the credit limit. Pay off the dues on the card where the outstanding balance is closest to the credit limit.
Also, applying for a new card when you already have a negative credit score, is a bad idea. New card purchases raise credit utilization i.e. the ratio between the credit limit and the balance. The higher the balance, the more it will affect the score. While making any purchase, try to pay in cash instead swiping your credit card. Lowering the balance will better the score.
Get a secured credit card
Do you have a bad Credit score but still want a credit card?
Try to get a secured credit card. Several major banks like SBI, ICICI, Citibank, and others offer secured credit cards against a nominal fixed deposit amount. This may help you build a good credit history. Timely repayment would get your CIBIL score a shot in the arm.
Timely EMI payment
Pending debts and loans have a huge impact on your credit health. It’s important that you pay back on time. Don’t keep your EMIs pending; it will compound your interest. Punctual and responsible payments would improve your score.
What can hamper your Credit Score?
Doing everything right but still facing problems to keep up with a good credit score?
Well, restoring your Credit score is only a part of the exercise, it’s not a one-time activity and you have to keep up with the payments. Several factors affect the Credit score, and it’s not only bad credit behaviour regarding payments, credit limit, etc. Choice of credit and some related issues also affects your score.
Here’s what you should not do to affect your credit score:
Credit utilization: This is one thing you should always keep in mind while purchasing anything on credit. The ratio, as already mentioned, is a major contributor to your credit score.
Sample this: Raj Saxena, 32, has five credit cards with a total of Rs. 10 lakhs credit limit (Rs. 2 lakhs on each card). But he actively uses only two cards. After a year, he decides to surrender the three unutilised cards. His total credit limit will now drop to Rs. 4 lakhs, thereby increasing his credit utilisation ratio; resulting a drop in his credit score.
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Loan inquiries: If you want to get a loan for buying a home or a car, it’s obvious that you will check out with a few lenders before taking any decision. But multiple inquiries could put a red flag against your name and adversely affect your credit score. For every inquiry you make with a lender, the proceedings are recorded, and that can affect your score. It makes difficult for the bank to decide whether to extend you the loan. Each inquiry you make, brings down the CIBIL score further.
Consider the case of New Delhi resident Jasjeet Arora, who wants to buy an apartment in the outskirts of the city. He contacts five different lenders for a loan of up to Rs. 80 lakhs to ensure that he can get the best deal. However, each of his inquiries will be reported to CIBIL due to which Jasjeet’s loan eligibility is likely to be reduced to Rs. 65 lakhs only, notwithstanding his good repayment records.
Repayments: It may come as a stunner. How can a repayment lead to a reduced Credit score?
Well, if you square off all your credit card dues at one go, it may affect your score and cause your financial records look unstable. This, in turn, leads to a reduced score. While regular repayments restore your credit health, a one-time squaring off does just the opposite.
Sample this: Kushal Chauhan earns a lumpsum money from the sale of some ancestral property. He decides to use a part of the money to pay off his entire credit card dues, hoping that it will increase his Credit score. But the credit card issuer, after receiving the payment, is likely to become suspicious of the transaction and will flag it. Kushal’s credit worthiness will take a hit rather than bolster it.
Also read: Here is how to read your CIBIL Credit Information Report
Increasing your CIBIL score is not a tall task. But it’s not easy either. It can be achieved with proper financial discipline. The most important thing is not to fall back on payments or stack up too much credit, once you have successfully restored your score. Remember, financial discipline is the key to a sound financial health.
Do the telephone (mobile/landline) bills matter in this regard. I have heard that talks are on to include this but its not yet final. Also if it is finalized will they consider the past records as well, or will they start fresh about the landline or mobile bills
As of now, late payments on telephone bills are not being considered for the calculation of credit score. However, discussions are ON between the credit rating agencies and telecom service providers to include the utility bill payments on your credit report and if that happens any late payment on telephone bills will have a negative impact on your credit score.
Any idea if the past behaviour would be reported to credit agencies or would it start fresh.
As of now, we do not have any information available on this matter.