A good credit score is a gradual feat achieved by understanding how the credit reporting system works. It's not just paying your bills on time, which is an indispensable part of building a good score, but several other smaller factors that need to be taken into account for establishing a clean credit score.
To understand the process of building your credit score, let us first understand three most important “C’s” of how to build good credit!
The First 'C' stands for Capacity: Do you exhibit the capability of repaying the debt?
Lenders need security and confidence that the loaned amount will be repaid. Wondering how you can enhance your capacity? Read along to find out!
- Select a profession in a stable industry that has stayed and shall stay in the market for long.
- Augment your budgeting skills and sustain them.
- Stay hands-free from debts as far as possible.
- Shoulder debt of nothing more than 30 percent of your income to avoid late payments.
- Don’t exceed 50 percent of your credit limit on any credit accounts.
The second 'C' represents Character consistency: Has your past financial behavior been good enough?
Your past financial behavior decides whether or not you are a reliable individual. In order to create a more complete picture of you as a potential debtor, and to determine how dependable you may be in repaying your debts, creditors may ask you about your past financial performance.
How to achieve character consistency?
- Have your credit diversified e.g. credit card, shopping card, car loan, etc.
- Make your payments on time without any delay.
- Avoid job-hopping for at least 1.5 years to exhibit loyalty and stability.
- Staying at the same address for several years helps too.
- Work towards building a flawless reputation at your job.
The third 'C' is for Collaterals: Are you rich on papers and capable enough to impart security?
What if you are unable to pay back? Do you have any assets that could be used to pay off your loan in the event that you are unable to do so? These are the concerns the creditor may display.
Follow the tips below to ensure check mark in all the boxes!
- Have an active savings account.
- If not huge, transfer small amounts to your savings account each month from our salary.
- Indulge in long-term investments.
- As far as possible, sidestep from withdrawing from your savings account.
- Have 6 months of emergency fund in place.
Now that we have optimum clarity of the three most important “C” s, let us cover accessory factors to ensure good credit!
Keep an eye-out for accuracy!
Checking your report regularly to warrant that the data input is accurate is a mandate. Keep an eye-out for errors or potential thefts. Something as obvious as changing your last name from your maiden name to your married name could make a large difference in your ability to obtain credit, as your married name and maiden name may not be linked within your credit history.
Build a strong credit history!
Give creditors something to look into. Without a background or a credit history of any sort, the creditors have a cumbersome time evaluating if or not you are a potential risk. Note that each individual has a separate credit file and report, so in case of married couple, spouses will each need a credit card or loan in their own name. If having loans and credit cards makes you anxious or uncomfortable, consider owning a credit card with lowest credit limit that you can pay off easily every month. This shall be a good enough foundation of being a trust worthy consumer.
The word of loyalty can go a long way!
Being loyal to your creditor helps. Lenders are always on the look out to see a strong history, hence, keeping the card open and active for longer durations can be beneficial for your credit score. In case the card you own is devoid of attractive offers like the new cards introduced, voice out your concern to the existing lender and opt for a plan change rather than all together canceling it.
A stitch in time saves nine!
Make your payments on time. Not paying your bills on time can lead to a massive dent on your credit score. In a worst-case scenario, if not the entire amount, make sure that you pay off the minimum required payment of your bills on time.(The writer is Content Manager, Finpin)