Your credit score serves as your financial fingerprint, influencing a wide array of your financial life. While you need to consider many factors at the beginning of the financial year like tax planning, budgeting, and applying for loans that meet your needs, you should not forget to manage your credit score effectively.
For those with an existing credit score, it can affect everything from securing loans and mortgages to determining interest rates and insurance premiums. For 'new to credit' customers who have never applied for a loan or credit card before, establishing a positive credit history is crucial. Much like the start of a new calendar year symbolises fresh beginnings and resolutions, the onset of FY25 presents an excellent opportunity to reassess one's approach to credit management and make proactive changes.
Initiating a credit journey
Building a credit score is important for everyone, but especially for people who are new to credit. The first step is to understand how to start building a credit history which will then help you develop a credit score. A strong credit score offers myriad advantages that extend far beyond simple borrowing capabilities.
Lenders use this score to assess your creditworthiness, enabling them to offer you better loan terms like lower interest rates, and higher credit limits. A good credit score helps you in more ways than just getting loans. It's also used by landlords, insurance companies, and even potential employers, to gauge your financial responsibility.
Follow these steps to start building your credit score:
Applying for credit
Initiating your credit history might involve applying for a credit card or a loan that suits your needs, be it personal, auto, home, student, gold, etc. Each category is designed differently, catering to specific requirements and financial situations.
Availing credit
Once you have a credit card or loan, start using it for small, manageable expenses. This ensures that you're actively building a credit history without risking falling into debt.
Managing credit wisely
Once you have access to credit, it’s crucial to use it wisely, thus avoiding overspending and ensuring timely bill payments or EMIs.
A good credit score can get you lower interest rates
Whether you are new to credit or someone who has been dealing with it for a while now, understanding the factors that influence your credit score is essential. Take the instance of two individuals applying for the same car loan. One has a high credit score due to responsible credit management, while the other has a lower score due to missed payments and high debt utilisation. The person with the higher score is likely to secure a lower interest rate due to their responsible financial behaviour. Therefore, it is important to invest time and effort into understanding the factors that influence your credit score. Here are the ways to improve your credit score:
Repayment history
Consistently making payments on time plays a significant role in maintaining a healthy credit score as it reflects sound financial behaviour.
Keep credit utilisation low
Maintain a balance in your credit usage to avoid maxing out your credit limits, which can impact your score.
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Diversify your credit mix
Having a variety of credit, such as loans and credit cards, can reflect positively on your ability to handle multiple types of debt responsibly.
Monitor credit reports regularly
Regularly reviewing your credit report allows you to identify and correct any errors that could adversely affect your credit score. It is advisable to assess the report every month.
Also explore: Free credit report and regular credit score updates on the Moneycontrol app and website
Avoid opening too many new accounts
Opening multiple new credit accounts in a short period may suggest financial instability or overspending to lenders, potentially affecting your credit score.
Apply for a secured credit card
If getting a regular credit card seems difficult due to a limited credit history, a secured credit card could be an option. A secured credit card is a type of credit card backed by a cash deposit, which serves as collateral and becomes your credit limit. This can assist you in establishing a positive credit score.
Keep your old credit accounts open
Retaining older credit accounts can help increase the length of your credit history, which can positively affect your credit score.
Knowing why credit score matters and what affects it, is key to handling your money well. Maintaining a good credit score is an ongoing journey that requires constant monitoring. If you want to build a credit score or reach the optimal credit score range, continue your efforts towards it. Remember, a strong credit score will help you build a brighter financial future.
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