Credit Score: How To Improve Credit Score and Unlock Financial Opportunities
14 January, 2025 | 17:58 IST
Credit score is a three-digit numeric representation of your credit worthiness. The score is calculated based on your credit payment history, including data from credit institutions and other entities. The credit card issuers, banks and non-banking financial companies (NBFCs) assess the loan applications based on the credit scores of the borrowers. It’s important to have a good credit score for quick approval of loans and other credit instruments.
If you’re seeking credit score improvement, it’s essential to understand the factors that impact your score and the strategies you can use to improve it. From timely bill payments to smart credit utilisation, a range of actions can influence your score.
Before diving into the ways to improve your score, it’s important to know the credit score range. A report titled ‘Empowering Financial Freedom: The Rise of Credit Self-Monitoring in India’, released by TransUnion CIBIL in August 2024, reveals that credit scores in India range from 300 to 900.
These scores are grouped into distinct categories:
Here are a few ways to help you boost your credit score.
Make timely payments: One of the most effective ways to improve your credit score is by ensuring all payments are made on time. This includes credit card bills, EMIs and other loan payments. Payment delays or missed EMIs not only incur penalties but also lower your credit score.
Pay off high credit card balances: High credit card debt can have a detrimental impact on your score. So, it’s advisable to clear your credit card balance as soon as possible, if necessary, even using a personal loan, which usually comes with a lower interest rate compared to credit cards. You can also access loan offers up to Rs. 15 lakh on Moneycontrol app and website to consolidate credit card debt and manage repayments through more affordable EMIs.
Keep track of your credit utilisation ratio: Another crucial factor in credit score improvement is maintaining a healthy credit utilisation ratio. This ratio refers to the percentage of available credit you are using at any given time and should ideally be kept below 30%. For example, if your total credit limit is Rs 1 lakh, try to keep your outstanding balance under Rs 30,000. Exceeding this limit can make you appear credit hungry, negatively impacting your score.
Limit new credit applications: Applying for too many loans or credit cards in a short period can hurt your credit score. Lenders may perceive it as a sign of financial distress, further lowering your score. It’s wise to avoid frequent credit inquiries unless absolutely necessary. The key is to apply for new credit only when you genuinely need it, and always ensure you have the capacity to repay it.
Maintain a mix of credit types: It’s beneficial to have a good mix of credit types, such as secured loans (for example, home or auto loans), and unsecured loans like personal loans or credit cards. Having a healthy balance between these different types of loans indicates responsible credit management, contributing to a stronger credit score. However, too many unsecured loans can also be viewed negatively. So, it’s important to maintain a balance.
Monitor your credit report regularly: A key part of credit score improvement is keeping an eye on your credit report to identify any discrepancies. Errors such as incorrect loan amounts, missed repayments or outdated information can drag down your score. Monitoring your credit report regularly ensures that any inaccuracies are quickly rectified. If you spot an error, immediately raise a dispute with the credit bureau to get it corrected.
Avoid co-signing or becoming a guarantor: Co-signing a loan or becoming a guarantor can affect your credit score if the primary borrower defaults on payments. In such cases, you could be held equally responsible, which can negatively impact your creditworthiness. Before agreeing to co-sign or guarantee a loan, ensure you fully trust the other party’s financial stability and repayment ability.
Build a good credit history: A long, positive credit history will improve your score over time. Even if you’ve had credit problems in the past, steadily paying off your debts and managing your accounts responsibly can help repair your score. If you’re new to credit, consider opening a credit card or taking a small loan to start building a credit history. Just ensure that you make all your repayments on time.
How long does it take to improve your credit score?
Credit score improvement doesn’t happen overnight. It usually takes several months of responsible credit behaviour to see a significant change. If you’ve had serious credit issues in the past, such as defaults or bankruptcies, it can take longer to improve your score. Generally, consistent effort over a period of four to 12 months can lead to visible improvement.
In conclusion, improving your credit score is a process that requires careful management of your finances and disciplined credit behaviour. By following the strategies outlined above, you can steadily improve your creditworthiness.
Moneycontrol app provides access to 100% digital and instant personal loan, giving you a convenient way to manage your financial obligations while improving your credit score.
Remember, improving your credit score takes time, but with patience and consistent effort, you can enjoy better access to credit at more favourable terms.
Summary
Improving your credit score requires understanding factors affecting it. With disciplined financial habits, you can steadily build a strong credit profile for better access to loans and other credit products.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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