How to improve your credit score

Unlike in past, today, the process of getting loan does not end at the ability of the borrower to repay. It entails large details of repayments history of the borrower. Due to such a critical factor, many a time, a lot of people fail to avail of a loan just because they have been irregular in their repayments of their liabilities. Such people have a low credit score—a number that gives a fair idea of deviation of an individual in repayments of loans. Hence, higher the credit score, better are the chances of getting a loan. Here are some of the factors you should bear in mind to improve your credit score:

On time…

Be it an outstanding amount on your credit card or EMI on a loan, you should pay it on time. Sometimes cheques take time to reach bank due to logistics issues and holidays. It is better to drop the cheques in the pick up boxes at least five - six days before the due date. There are instances where borrowers repay only the minimum payment required on credit cards or opt to make part payment of EMI. Part payments typically lead to a lower credit score. It is better to make payments electronically and have standing instructions on your bank account to ensure that the bills are paid on time. In case of standing instructions, it is important that you should have sufficient amount of money in your bank account for smooth execution of standing instructions.

Loan accounts…
Too many credit cards or loans bring down credit score. Ideally, you should have couple of credit cards with reasonable credit limit supported by your income. It is better to have two credit cards with credit limit of Rs 1 lakh each than five credit cards with Rs 40000 each. If you have too many small loans, you should consolidate such small loan accounts into one and repay the loans on time.

Too much unsecured credit…
If you have unsecured loans such as credit cards and personal loans running against your name, your credit score tend to dip. You should have a mix of secured and unsecured loans with majority of borrowing in the secured loans category. You should avoid a situation where you have five personal loans and six credit cards to be serviced at the end of each month. Having a home loan, however, would not impact your credit score adversely.

Credit limit…
Many times individuals keep using credit cards issued to them long ago. Banks do not aware of rising income of the cardholder and cardholders too don’t tell the banks about the rise in their income. When such cardholders end up using most of their credit limits, it gives an impression that they are dependent on credit to survive. It is better to contact your bank and increase the credit limit, if your existing credit limit is not enough as your lifestyle improves. Some individuals keep using one card to full when they have two. It is better to spread your expenses across cards. If you have two cards having credit limit of Rs1 each, do not spend Rs 95000 on one and Rs 10000 on the other. Try to spread equally between these two, so that it does not seem that you are almost exhausting your credit limit on a card.

Disputes…
If you are fighting with a bank on a card outstanding or a loan repayment, never opt to settle the disputes by paying part of the money outstanding. In that case there is an adverse remark registered in your credit report. Instead be amicable with banks. If a bank has made an error in computing your loan outstanding, it is better to point it out to bank and resolve the dispute. Most importantly, if you have found yourself in disputes, face it and resolve, instead of running away or ignoring it.

Diligence…
Do not sign as a 'guarantor' on loan applications without proper diligence of the matter. If the borrower defaults, your credit score goes down. Also do not make too many credit inquiries in a short span of time. Many times individuals keep applying for credit cards one after another. Multiple applications may mean credit-hungry behaviour. Typically, it is observed that if you have a long history of unfaltering repayments, you stand a better chance of availing a credit.

As banks insist on a credit score while sanctioning a loan, there are cases where individuals come to know about their poor credit score at the time of loan applications. It is better to seek professional help if you cannot improve your credit score yourself. Improving a credit score is a gradual process and there is no 'get it right quick' solution. So do not throw money on any service that claim to be selling a quick solution.

The writer is a Co-founder & Director at  www.creditvidya.com .