How to improve your credit score?

Gaurav Jalan

Many people lose out on good credit deals because they don’t realise the criticality of maintaining a robust credit score. An individual’s credit history and credit score remain the fulcrum for funding decisions, which include whether to approve a loan or not and the interest rate to be charged.

Indeed, the insurance premium amount a person pays for their vehicle or house can also be influenced by a good or bad credit score, as could credit card approvals. Derived from the information and reports submitted by banks and financial institutions, credit bureaus maintain these scores include – TransUnion CIBIL, CRIF High Mark, Experian and Equifax.

An individual’s credit score is represented by a three-digit number ranging between 300 and 900 that reflects his/her creditworthiness as a borrower and customer of financial products. Any score above 750 is generally termed as good. Those below this number are subjected to proper due diligence before any loan or financial products such as credit cards are approved. Therefore, common sense requires that people ensure they maintain a healthy credit score at all times.

Here are ways to ensure one’s credit score stays healthy.

Make prompt payments

Customers must make sure their loan EMIs (equated monthly instalments), credit card bills, as well as payments to telecom and other service providers, are paid on time every month. For this, one can opt for ECS (electronic clearing service) debit and other auto-payment modes via bank accounts, credit cards or digital wallets. If a person prefers manual payment, a monthly reminder system can help.

Track the credit utilisation ratio

Credit card users need to maintain a healthy credit utilisation ratio. Typically, this is 30 percent or below the entire available credit limit. Don’t exhaust the entire credit limit on a card because this denotes poor credit utilisation, which hurts the credit score. If monthly expenses are on the high side, it’s better to seek an increase in the credit limit or opt for an additional credit card to ensure a healthy credit balance.

Keep old cards or accounts operational

Often, a person is tempted to close old bank accounts or credit cards since these are used minimally. But it’s better to retain old accounts/cards as it highlights one’s prolonged association with a financial institution, indicating a responsible repayment history. If these old accounts are closed, it negatively impacts impacting the credit score.

Check the credit score regularly

Checking one’s credit score regularly ascertains a person can take corrective action immediately if the score has slipped. If this happens, an individual should access his or her credit report and check for errors or inaccuracies that may have crept in. If there is any discrepancy or incorrect information, one can raise a dispute with the concerned bank or lender and make certain these are resolved at the earliest. Keeping this in mind, regular score checks are imperative.

Manage a proper credit mix

Credit bureaus generally give higher weightage to secured loans such as home and vehicle loans in determining credit scores. Unsecured loans typically have lower weightage, although given the increasing availability of unsecured loans online, bureaus are adjusting their algorithms to include higher impact of unsecured loans. To have a balanced credit score, unsecured loans should be offset by secure ones that provide a higher score. Customers with a vibrant credit mix are not perceived as high-risk borrowers.

Monitor joint and co-signed loans

If there are any joint, co-signed or guarantor loans, these must be monitored every month because an individual is considered equally liable in case of any missed payment or default. Given this scenario, it’s essential to track all such loans to check there is nothing amiss in the repayments. This is necessary because any negligence on the borrower’s part could end up affecting the guarantor’s credit score and the ability to obtain credit on favourable terms.

Avoid multiple applications for credit

Credit and its allied products should always be availed in moderation. If a borrower puts in multiple applications for a new card or loan, lenders will view such behaviour with suspicion. Given the greater due diligence that follows, the chances of approval are lower. This is because it indicates a person is seeking excess credit, which can raise the debt burden, making it likely the borrower may find it difficult to honour commitments.

Avail of one or more credit products

Persons lacking any credit history face similar difficulties as those with a bad record. Although a loan or other credit offering may still be approved, the interest rate will be higher or the terms won’t be as favourable. Considering this situation, it is advisable to have at least one credit card to create and maintain a proper credit record.

Consolidate diverse debts

If a person makes monthly repayments to multiple lenders and credit card providers, inadvertently or otherwise, one may miss a payment. If this happens, the credit score suffers. To avoid this, it is best to take a personal loan to pay off all the debt which is more expensive, for instance, credit card dues. Making a single consolidated EMI payment each month is easier compared to overseeing various debts with different due dates. What’s more, a personal loan can be availed at a lower interest rate, unlike credit cards, where the rates are much higher.

By understanding what factors affect a credit score and adhering to some simple guidelines as outlined above, individuals can ensure that they maintain a good credit score. As credit becomes an increasingly important part of our financial planning, having a good credit score is paramount.

(The writer is the Founder and CEO – mPokket)