A credit score is a three-digit number that lenders use to determine the likelihood of being repaid on time while granting a loan or a credit card. This important financial factor can affect how much and how frequently you can borrow. The higher your score, the better your chances of qualifying for loans at favourable terms. The same goes for credit cards.
Banks and other credit issuers do not easily lend loans to individuals with a low credit score because they see a higher risk of default in such cases. If you can get a card or a loan despite having a low credit score, then chances are that your credit limit will be low or you may have to shell out higher interest rates. To prevent this, it is advisable to aim for a higher credit score. In this blog, we will explain credit scores along with smart tips to improve your credit score.
What is a good credit score?
A Credit Score is calculated and assigned to borrowers by credit bureaus such as CIBIL, Equifax, HighMark, etc. It is used to assess your creditworthiness by prospective lenders and is one of the most important factors considered by bankers before lending any money. In simple words, a credit score tells whether you have been a good or a bad borrower.
Credit scores range between 300-900. The higher your score, the better it is considered. Anything between 300-550 is considered as a poor credit score, while the range of 550-700 is fair. For a score to be considered as good or excellent, it has to range between 700-900.
A higher credit score means that you have an excellent credit history. On the other hand, lenders will doubt your credit behaviour if you have a low credit score. However, don’t be dismayed because you have a low credit score as you can always try to work towards improving it. Read on to find out how.
Top tips to help improve credit score
Here are some expert tips to improve credit score and avail maximum benefits from loans and credit cards.
Make timely payments
Never miss out on repayments towards an outstanding loan. If you want to improve your credit score, ensure that you are punctual with your EMIs. Remember, delayed EMIs will affect your credit score negatively and you may also end up paying penalties for it. Setting a reminder for making payments is a good start towards adopting repayment discipline.
Review & rectify errors on your credit report
Never assume that you have a poor credit history by blindly relying on credit reports. Maybe the report is flawed. There could be chances that you have paid your loan in full, but the report reflects it as ‘still outstanding’. Similarly, check for any other fraudulent or suspicious activities on your report. Get these rectified by reporting to the Credit Bureaus to ensure a good credit score.
Focus on credit mix
Always go for a healthy credit mix comprising unsecured and secured loans. Lenders often prefer to easily lend to individuals who have more secured loans as compared to unsecured ones. You will have a good chance of improving your credit score with a good credit mix. In case you presently have more unsecured loans vis-à-vis secured ones, try to close the unsecured loans first.
Restrict credit utilisation
Using your credit limit to its maximum can hamper your credit score. Hence, ensure that you limit credit card usage to its 30-40% capacity every month. With a regular focus on credit utilisation, you can attain the desired credit score and easily attain credit when you need it. Always remember to accept a higher credit limit on a credit card in case your bank or lender offers. The idea is to have a larger credit limit and maintain a low utilisation ratio to ensure a good credit score.
Opt for a longer loan tenure
If you are sourcing a fresh loan, choose a longer loan tenure for repayment. This will ensure that the monthly EMIs are low and you can manage the repayment with no undue pressure on your finances. This is helpful, especially if you are already paying a significant amount of EMIs.
Limit number of loans to a minimum
Before you source a fresh loan, try to check if you have repaid all existing loans. If you borrow multiple loans, it may show that you are credit hungry and this can affect your credit score. It is ideal to take one loan at a time, repay the same on time, and then go for a fresh loan with an improved credit score.
Pay your credit card bills fully
Using the option of minimum credit card bill payments every month can harm your credit score. You could also end up piling huge outstandings in the future. For a good credit score and improved chances of easily securing loans in the future, try to pay your bills in full each month.
Once you have attained a good credit score, it is important to maintain it by adopting good practices such as regular checks on personal loan EMIs and discipline around credit card bill payments.
How long does it take to rebuild credit?
Rebuilding credit can take time and effort, but it is an important step for anyone looking to improve their financial standing. The amount of time it takes to rebuild credit in India can vary depending on individual circumstances, but there are several steps that can help speed up the process. Here are some factors to consider:
- Payment history: The most significant factor in rebuilding credit is establishing a consistent record of on-time payments. If you have missed payments or defaulted on loans, it will take longer to rebuild your credit.
- Debt-to-income ratio: Lenders look at your debt-to-income ratio when considering loan applications. Keeping your debts low and income high can help improve your creditworthiness.
- Credit utilization: Keeping your credit card utilization low can help boost your credit score. Ideally, you should aim to use less than 30% of your available credit.
- Length of credit history: A longer credit history with consistent on-time payments can improve your credit score. If you are new to credit, it may take longer to establish a strong credit history.
- Errors on credit report: Review your credit report regularly and dispute any errors or inaccuracies that may be negatively impacting your credit score.
- Types of credit: Having a mix of credit types, such as credit cards, loans, and mortgages, can help improve your credit score over time.
Generally, it can take anywhere from six months to a year to see a significant improvement in your credit score. However, it’s important to remember that rebuilding credit is a gradual process that requires patience, diligence, and responsible financial habits.
Why is a good credit score crucial?
A credit score is verified by all lenders before granting a loan or issuing a credit card. Let us understand why a good credit score is so crucial for lenders and borrowers alike:
- Easier access to credit: Your credit score is the reflection of your credit behaviour. It shows whether you can manage your finances well and therefore, whether the lender should extend a credit facility to you.
- Possibility of getting a lesser rate of interest: With a good credit score, there are higher chances of getting a credit facility like loans or credit cards at lower interest rates and sometimes, less paperwork too.
- Increased power of negotiation: Lenders look forward to lending to individuals with good credit scores. So, if you have a good score, you could have an upper hand while negotiating the terms and conditions of your loan like a higher loan amount or a longer tenure.
- More chances of bagging pre-approved offers: With a good credit score, you could also have more chances of getting pre-approved offers which are essentially loans without paperwork.
For a healthy credit future, begin monitoring your credit score today, including credit utilisation. Keeping a constant check of your credit score will come with many benefits in the long run, such as better negotiating power, lower interest rates, and scope to borrow larger credit. Make regular use of your credit score to avoid falling into a debt trap.