How to Improve Your Credit Score?

A Credit Score is calculated by credit agencies/bureaus; the four RBI-licensed ones in India are TransUnion CIBIL (Credit Information Bureau India Limited), Experian, CRIF High Mark and Equifax. Banks and financial companies consider this score along with other factors such as your income and age to evaluate your eligibility for a financial product like a loan or credit card.  

It’s a 3-digit number that lies in the range of 300 to 900, and is essentially a numerical representation of your ability to repay the credit being borrowed on time. The higher the score, the better the chances of you securing a loan at a better interest rate. Here’s everything you need to know about what’s a good credit score. {link to How Important is a Credit Card for Home Loans} 
 

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The Score Calculation

Credit agencies primarily take into consideration factors such as your credit history, credit mix/type, credit usage ratio and other factors. Here’s a breakdown of the weightage given to each factor: 

Factor Weightage 
Credit History 30% 
Credit Type/Mix 25% 
Credit Usage Ratio 25% 
Other 20% 

Read more on How a Credit Score is Calculated! 

Advantages of Having a High Credit Score 

Some notable benefits that you enjoy when you have a good credit score are: 

  • Loans at Lower Interest Rates  
  • Lower Loan Processing Fee & Charges 
  • Quick Approval of Credit (credit card and loans) 
  • Higher Credit Limit 
  • Access to Best Deals & Offers 

Steps to Improve Your Credit Score 

As stated earlier, a good credit score does not guarantee that a lender will approve your loan since there are a number of other factors a bank/financial company will consider besides your credit score but it does improve your chances significantly. Let’s quickly look at a few steps you can take to ensure a better score. 

  1. Paying Credit Dues on Time: Remember how credit history carries 30% weightage in calculating your credit score? That makes paying your loan EMIs and credit card bills on time very important. In case you have multiple debts, make it a point to set up alerts or reminders to avoid a delay or missed payment. When you default or delay payment, the credit agency perceives you as being inconsistent with repayment. 

Note: According to a report by Financial Express, a 30-day delinquency can reduce your credit score by 100 points.

  1. Clear Off Outstanding Dues: Unpaid debts reflect on your Credit Report and affect your score negatively. So make sure to clear off all outstanding dues even if they aren’t of a huge amount. 
  1. Credit History and Duration: If it’s been a long time since you opened a credit account meaning you have a number of years in credit history, it allows agencies to understand your credit behaviour more effectively. It is advisable to start building a strong credit history early on to help build a good credit transaction record.  
  1. Avoid Sending Multiple Applications: To avoid looking credit hungry, it’s better to not send multiple applications for credit. When you apply for a loan/credit card, the lender places a “hard inquiry” for your credit report. Multiple hard inquiries are reported and will affect your credit score adversely. Find out your loan eligibility in a click!  

Note: In case your application has been recently rejected, try to wait a while and improve your score before you send out another application. 

  1. Pay Monthly Dues in Full: A lot of times when money is tight people choose to pay off only a small amount of the outstanding principal known as the minimum amount due. This in turn increases your debt with the interest compounding on your outstanding balance. To credit bureaus, this will show poor repayment behaviour and therefore it’s advisable to pay your dues fully. 
  1. Have a Credit Type Mix: Try to maintain a mix of secured and unsecured loans; secured loans such as home loans and auto loans are backed with a collateral while unsecured loans such as a credit card or personal loan do not come with a security. It’s important to note that any default in repayment of these loans will affect your score negatively. While a higher composition of unsecured loans is not favourable, secured loans repaid on time actually has a positive influence on your score. 

Note: If you’ve used a Credit card for a number of years, avoid losing its credit history by closing the account.   

  1.  Maintain Low Credit Utilization: Your credit utilization is the portion of the credit limit you have utilized, and its ratio is calculated by dividing credit balance by credit limit and then multiplying by 100. Fincity advisors recommend that you try to not exceed using 30% of your credit limit. Using over 50% of your credit limit can have a bad impact on the score and indicate to lenders a high risk of defaulting. 

If you have more concerns about your credit score or want a more detailed account of how lenders calculate your eligibility, feel free to connect with a Fincity advisor at hl@fincity.com and have all your doubts cleared! Our experts can even help you get the best home loan deals at the lowest interest rates. 

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