16 October, 2024 | 12:01 IST
Your credit score is an indication of your financial health and how efficiently you manage your credit instruments. Lenders always prefer borrowers with a high credit score. A high credit score can help you avail loans and credit cards at lower interest rates. It’s a common notion that borrowers with a low income may not have a good credit score. However, the reality could be to the contrary. Your income level may not have a direct effect on your credit score always. For credit score, your existing borrowings and how you manage the credit instruments could be crucial. If you miss payments for loans or credit cards due to low income it may affect your credit score negatively.
A low income may not necessarily be a barrier to having a high credit score. The good thing is that you can still improve your credit rating, even while managing your expenses on a tight budget.
Let’s take a look at ways you can improve your credit score despite facing a cash crunch.
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Credit scores are vital indicators of your ability to manage debt responsibly. The Credit Information Bureau (India) Limited, or CIBIL, is a leading credit information provider, licenced by the Reserve Bank of India (RBI). In addition to CIBIL, there are three other credit information companies — Experian, Equifax and CRIF Highmark in India.
The credit score is a three-digit numerical representation of your credit history, rating and report, ranging from 300 to 900. Generally, a score of 750 or above is considered good, while a score closer to 900 indicates a stronger credit rating.
This score serves as a crucial first impression for lenders — a higher credit score suggests that you are a lower-risk borrower, significantly increasing the likelihood of your loan or credit application being reviewed and approved. It’s essential to remember that while the credit bureau provides this score, the ultimate decision on loan or credit card approval lies with the lending body.
Building a satisfactory credit score requires time and responsible credit usage. Any new activity may take around 3 to 4 months to reflect in your credit report.
Your income does not directly impact your credit score since credit scores are based solely on the information contained in your credit report, which include all your borrowings and repayment of debts.
Lenders evaluate your income to assess your ability to repay, making it a vital component of the overall evaluation process.
Insufficient income can lead to missed payments or increased debt, both of which can negatively affect your credit score. So, it’s essential to adopt strategies that help you maintain a healthy credit profile, even in the face of financial constraints. By being proactive in managing your finances, you can work towards protecting and improving your credit score over time.
There are several ways to improve your credit score even on a low income:
Review your credit report regularly
One of the important steps to improving your credit score is to examine your credit report for any errors. These errors can have a negative impact on your credit score. Users can get a free credit score and a detailed credit report on the Moneycontrol app and website. You can report any errors in your credit report directly to the credit bureaus. Correcting inaccuracies can lead to a significant increase in your score.
Make timely payments
This is one of the most important factors impacting your credit score. Ensure that you make all your debt payments, such as credit card bills and loans, on time. This practice not only helps maintain your score but can also improve it over time. Some ways to manage payments include:
Maintain a low credit utilisation ratio
Credit utilisation, or the ratio of your credit card balances to your credit limits, is another important factor affecting your credit score. Aim to keep your credit utilisation below 30%. To do this, pay off your credit card balances in full each month. If that’s not always feasible, try to keep your total outstanding balance at or below 30% of your total credit limit.
Limit new credit applications
When you apply for new credit, lenders conduct hard inquiries into your credit history, which can impact your credit score. Limit the number of new credit applications you make, as multiple inquiries within a short period may signal financial distress to lenders. Focus on managing your current credit accounts before applying for new ones.
Monitor your credit score regularly
Keeping a close eye on your credit score and report is essential for tracking your progress. Regular monitoring allows you to catch any new issues or errors early. You can check your credit score instantly for free on the Moneycontrol app. By staying updated, you can take prompt action if any negative changes occur.
Apply for an FD-backed credit card
You can also apply for a fixed deposit-linked credit card when your monthly income is low. Many banks offer a credit card against your fixed deposits (FDs). This is a secured credit card and could be a good addition to your credit mix or if you are new to credit. Generally, the card issuers offer up to 80%-90% of your FD amount as the approved credit limit for such credit cards. Generally, the FD-linked cards come with comparatively lower fees and interest rates due to their secured nature.
Improving your credit score with a low income may seem challenging, but it is possible with the right strategies. You can increase your credit score by regularly reviewing credit reports, raising complaints against errors, making timely payments, maintaining a low credit utilisation and limiting new credit applications. Remember, a better credit score can open doors to better financial opportunities, even if you are on a tight budget. For monitoring your credit score you can also take help of digital platforms like Moneycontrol.
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