Increased dependence on borrowed money to finance our needs and desires, has increased the importance of Credit Score. In case you are not aware, Credit Score is a simple 3-digit number — normally between 300 and 900 — assigned by RBI-approved Credit Rating Agencies namely CIBIL, Experian, Equifax and CRIF High Mark. It denotes whether you are a “good” borrower or a “bad” one. It forms part of the Credit Report that summarizes your borrowing history.
A good Credit Score not only makes it easy for you to raise loans but also get them at lower interest rates. In fact, banks can even decline to give you a loan, if your Credit Score is below par. Therefore, in current times, it has become vital to have a healthy Credit Score. Accordingly, enumerated below are some of the really easy steps to build a good Credit Score.
Don’t delay. Don’t default.
I am sure you like your salary to be paid in time. Likewise, the lenders too like their payments to come in time. Hence, put an immediate end to late and/or missed payments on all your loans and credit card bills. This is one of the quickest and the simplest ways to improve your Credit Score. Good payment history equals Good credit score.
Use your credit card up to 1/3rd the maximum limit
Lenders like people who are good at managing their personal finances. Obviously! Those who can’t handle their money matters wisely are more likely to default on their liabilities. One of the ways to prove that you would be a good borrower is to keep your actual credit card usage well below the sanctioned limits.
This is an indicator that you are living well within your means and not depending on borrowed money. Low credit usage equals High credit score.
Don’t keep too many credit cards or borrow many loans
Having too many liabilities is a clear sign of lack of financial prudence. This, naturally, translates into the person being considered as a high-risk borrower.
Therefore, keep at most 2 or 3 credit cards. And, consolidate your many loans into 1 or 2 big loans. This will make your debts more manageable and less prone to defaults. This will send a signal to the lenders that you are a responsible borrower. A limited number of loans and credit cards equals High Credit Score.
For banks, the risk is less, if their loan has an underlying security (e.g. a home loan). Without security (e.g. a personal loan), the bank is exposed to higher risk. Naturally, therefore, you should aim to reduce your unsecured borrowings to the extent feasible. You can either prepay them. Or, borrow a new ‘secured’ loan to pay off the ‘unsecured’ ones. This will improve your credit profile. A higher percentage of secured borrowing equals High Credit Score.
No new loan or credit card enquiries
You can very well appreciate what the lenders will think if your credit history reveals too many loan enquiries. They would surely be worried about your financial status. So the easiest thing to do is to stop applying for a new credit card(s). And, stop applying for any new loan(s). This is the sure shot way to demonstrate your commitment to financial discipline. A lesser number of loan or credit card applications equals High Credit Score.
Even being a guarantor affects the credit score
Many people guarantee the loan(s) availed by their relatives or friends. This is not a direct liability in their name. But, they are liable to pay if their relative/friend defaults. In other words, lenders have to assign some risk-weightage to such indirect liabilities too, while assessing your creditworthiness. Therefore, it stands to reason that you should keep your loan guarantees to the minimum. A lesser amount of loan(s) guaranteed equals High Credit Score.
New vs Old borrower
New borrowers have not yet got the chance to establish that they are good borrowers. Whereas existing borrowers have had a long credit history to their name. It is therefore obvious that building a good history — of timely repayment of your loan liabilities — is a matter of time. Don’t expect quick results here. With each passing year, more data will accrue to your credit history. This will give the lenders more insight into your financial discipline and commitment. Longer (good) credit history equals High Credit Score.
Important Endnote: Since last year, you are allowed access to one “free” Credit Report per year. Get in touch with any of the credit rating agencies or platforms like Paisabazaar at the earliest and obtain your Credit Report. Analyze the same and work upon the areas that need improvement. You ‘owe’ it to your family and yourself.