Ways of Improving Your Credit Score

What Are Credit Scores and CIBIL Scores?

A credit score is a number given by a credit information company (CIC) that indicates a person’s creditworthiness. In India, four RBI licenced CICs maintain the credit records of individuals. These are CIBIL, Equifax, Experian, and CRIF Highmark.  

A CIBIL score is a 3-digit numeric summary of your credit history. The score is based on a number of factors like your repayment track record, credit utilisation ratio, credit mix (secured and unsecured loans), number of credit applications, ageing of credit instruments, etc. The CIBIL score ranges between 300 and 900. Generally, a credit score above 700 is considered good. The higher the credit score, the better.

How to Get a Credit Score?

You need to take a credit card or a loan to get a credit score. When you start paying the loan EMIs or the credit card monthly bill on or before the due date regularly, you start developing a credit score. As you keep making payments month after month and adhere to other factors affecting credit score, your score keeps improving.

Factors Affecting Credit Scores Most

Some of the factors that affect the credit score adversely include the following.

1). Not Making Payments on Time

If you don’t pay your loan EMIs or credit card monthly bill on or before the due date, it will impact your credit score adversely.

2). A High Credit Utilisation Ratio

If you use your credit card for an amount beyond a specified percentage of your credit limit in a billing cycle, your credit score will be impacted negatively.

3). Unhealthy Credit Mix

If you have only one type of loan or an unhealthy mix of secured and unsecured loans, your credit score will be impacted negatively.

4). Too Many Credit Applications in a Short Time

If you make too many credit card or loan applications in a short time, it will hit your credit score.

Now that you understand the factors that affect your credit score negatively, let us look at how to improve your CIBIL score.

How Do You Increase Credit Score?

Some of the ways to improve credit score include the following.

1). Timely Payments

Making timely payments has the highest weightage in maintaining and improving your credit score. These include payment of the loan EMIs, money drawn from an overdraft, credit card outstanding, etc. You can either automate these payments or set reminders for them. Delaying even a single payment can lead to a big hit on your credit score. Also, repairing your credit score from such hits will take time. Hence, you should always prioritise timely payments.

While taking a loan, choose an EMI that you can service comfortably without financial strain. Any delays/defaults in EMI payment will spoil your credit score. If you choose a shorter tenure than your finances allow, it will put a financial strain on you and increase the risk of delay/default in EMI payment. If you choose a longer tenure than required, you will end up paying more interest. You need to choose a sweet spot between the tenure and the EMI.

It is recommended that you always maintain an amount equivalent to one additional EMI in your bank account used for EMI payments. The additional EMI will come in handy whenever you face a financial crunch in any particular month.

2). A Low Credit Utilisation Ratio

The credit utilisation ratio refers to the percentage of credit you use from the overall limit available. For example, if your credit limit is Rs. 1,00,000 and you have utilised Rs. 20,000, the credit utilisation ratio will be 20%. A ratio of 30% or less is considered healthy and contributes towards improving your credit score.

If your ratio is above 30%, you should work towards bringing it down to 30% or lower. If a bank gives you a limit enhancement offer on your credit card, you should accept it. A higher credit limit with the same monthly expenses will lower the ratio. If a bank offers you a free lifetime credit card, you may take it as it will increase your overall credit limit and contribute towards lowering the ratio.

3). A Healthy Mix of Secured and Unsecured Loans

Secured loans include those that have collateral. Some of these include a home loan, vehicle loan, loan against shares, etc. Unsecured loans include credit cards, personal loans, etc. A healthy mix of secured and unsecured loans contributes towards improving your credit score.

4). Holding on to Old Credit Cards

Do you have any old credit card(s) issued on a lifetime free (LTF) basis? Even if you don't use the card, you should not close it. The older the loan/credit card that you hold, it contributes towards enhancing your credit score. A long credit history helps in bettering the credit score. Hence, if you have any old credit cards, you should not close them even if you don't use them.

5). Not Making Too Many Credit Applications Within a Short Period

When an individual applies for too many loans/credit cards and that too in a short time period, it shows the person is credit-hungry. It impacts the credit score adversely. Hence, you should make one credit application at a time and wait for the bank’s decision on approval or rejection.

Please note that every credit application may lead to a hard inquiry, temporarily lowering the credit score. Hence, you should apply for a credit card or any loan only when necessary. Do thorough research before applying for credit cards, rather than cancelling the card after getting them.

6). Monitoring Loans Where You Are a Guarantor

If you are a joint applicant, co-signor, or guarantor for any loan, monitor it for timely EMI payments. If the borrower delays any EMI payment, it will hit your credit score (as a guarantor) also along with theirs. In future, it will impact your ability to get a loan adversely. To avoid such a situation, it is recommended that you avoid becoming a guarantor for any loan.

7). Maintain Healthy Debt Levels

You may feel that debt is the root cause of a poor credit score, so debt should be eliminated. However, eliminating debt will not result in improving your credit score. You need some level of debt. When you keep paying that debt regularly, it will help in improving your credit score. Hence, you may maintain debt at a healthy level.

Credit cards are the best way to build and maintain your credit score if you don't have any loans. Using credit cards every month for regular expenses and then paying the monthly bill before or by the due date can help improve your credit score.

8). Reporting and Rectifying Any Inaccuracies in Your Credit Report

You may be taking all of the above steps. However, your credit score may still not be showing the expected improvement. If that is the case, you should check your credit report for any discrepancies that may be pulling down your credit score. If you see any inaccuracy in your credit report that has affected your credit score adversely, report it immediately to the bank for rectification. 

For example, you may have repaid a loan, but it may not be reflecting in the credit report. Once the inaccuracy is rectified, its adverse impact on the credit score will be reversed. Some banks, fintechs and other institutions allow you to access your credit report free of cost. You may use this facility to check your credit report regularly, say, once every quarter.

Benefits of Having a Good Credit Score

Some of the benefits of a good credit score include the following.

1). Loan Approvals

A good credit score of 750 and above can help you get loan approvals. The higher the credit score, the faster the chances of getting a loan approval. Some banks may send you pre-approved loan offers based on your good credit score.

2). Better Interest Rate

Some banks offer lower interest rates on loans to individuals with a higher credit score than others. Even a 0.25% lower interest rate on a big home loan will make a big difference over the 20-year life of the loan.

3).  Credit Cards

Having a good credit score makes you eligible to apply for credit cards, subject to fulfilling other criteria. Banks too would prefer to have customers with good credit scores as their credit card customers.

Improve Your Credit Score to Reap Its Benefits

A good credit score can be your stepping stone for getting loans and credit cards in future. Hence, it is important for you to maintain a good credit score. The steps mentioned in this article are easy to follow and, at the same time, very effective in improving your credit score. Follow them, improve your credit score and enjoy the benefits of it.

FAQs

Can Someone Without a Credit Score Get a Credit Card?

Yes, individuals who don’t have a credit score can get a secured credit card. It is issued against the security of a fixed deposit on which a lien is marked. The credit limit is usually in the 75 to 90% range of the fixed deposit amount.

What Is a Hard and Soft Credit Inquiry?

A soft inquiry is an overview of your credit report. It doesn’t decrease your credit score. A hard inquiry is a detailed check of your credit report. It decreases your credit score by a few points.

If There Is Any Discrepancy in My CIBIL Report, Can I Ask the CIBIL to Rectify It?

If there is any discrepancy in your CIBIL report, you can report it to the respective bank. The bank will then take it up with CIBIL and get it rectified.

If I Check My Credit Report Frequently, Will It Affect My Credit Score?

Any individual checking their credit report doesn’t impact the credit score. Hence, you may check your report as many times as you want.