Credit score plays a crucial role in deciding your eligibility to get a loan approved. Your credit history, which includes previous credit obtained and related payment patterns, is used to calculate your credit score. A high score indicates strong creditworthiness, whereas a low score shows otherwise. Therefore, if you have a low credit score, lenders will view you as a high-risk borrower and are less likely to approve your loan application.
The range of a credit score, aka CIBIL score in India, is 300–900, with 300 denoting a poor score and 900 representing the best possible score. To get the best offers on interest rates for loans, your CIBIL score should be closer to 900. Most lenders, including banks and Non-Banking Finance Companies (NBFCs), consider a CIBIL score of 750 or above (750-900) optimal.
Now that we know the significance of a credit score, it is time to understand how you can increase it.
Nine Tips to Better Your Credit Score
Analyse Your Credit Report
Regularly checking your credit reports is a good idea; it will help you find any discrepancies in the report that may have contributed to reducing your credit score. Once you identify any mistakes, such as defaults or payment delays, you can contact the credit rating agency and get it rectified. This aids in improving credit scores.
Be Mindful of Your Credit Utilisation Ratio
Do not use your credit card to carry out all transactions. According to experts, keeping the credit utilisation ratio at 30% or less is best. Following this will have a positive impact on your credit score. A high credit utilisation ratio shows you as a credit-hungry individual, which is not a good sign.
If You Receive a Rejection, Stop Applying for Credit
Your credit report will contain information on any loan or free credit card apply you have made and were denied. Now a point to remember here is that any rejection negatively impacts your credit score. Now, if you immediately apply to a different bank, they may reject it if they notice your low score and the previous denial. In these situations, the best course of action is to wait for the score to increase rather than reapplying.
Repay Your Debts on Time
Make it a priority to start being on time with your payments if there are any loans for which you have been paying late. In addition, you can ask your bank to assist you in restructuring your debt if you have trouble making ends meet with your existing EMIs. Since late payments indicate that you are not a responsible borrower, it lowers your credit score.
Get a Variety of Credit
There are two kinds of loans: secured loans and unsecured loans. Banks often view taking on too many unsecured loans as a negative. So, you can seek secured and unsecured loans. If you maintain this healthy mix of credit, it will help improve your credit score.
Pay Attention to Joint Applicants
Even if you are not at fault, you still might suffer in circumstances where you were a co-applicant for a loan that someone else had taken and had defaulted on their payments. It would negatively affect your credit score because it would appear on your report. Making sure that the loans and credit cards are paid off on time is the best prevention approach.
Select a Credit Card That Best Matches Your Spending Style
Having a card with flexible credit card payment offers and using it wisely while making timely payments is one of the best strategies to establish or increase your credit score. Your credit score will improve if you make on-time monthly credit card payments.
You must conduct extensive research before requesting a credit card. Then, compare the terms of cards that can meet those criteria after considering your needs. Finally, you can use the credit card provider's portal to cross-check and compare credit card offers.
Acquire Authorisation to Use Someone Else's Account
If you are under the legal age for a free credit card application (18 years of age or younger) and seeking ways to establish a credit score, you can obtain a credit card as an authorised user. You can gain access to someone else's account as an authorised user. This indicates that you will be given a card linked to your account to make purchases using your credit limit. The account holder is in charge of payments, but the account details will also show up on your credit report. Although it won't help you establish your credit score as rapidly as with your card, being an authorised user still helps.
Make Paying Back Your Debt a Habit
Even if you cannot pay off your entire credit card balance, you should still make an effort to pay at least the minimum amount due by the due date. This will demonstrate to lenders that you don't have a pattern of skipping payments. However, remember that paying off as much of your credit card debt raises your credit score quickly.
Wrap Up
A low credit score can harm your ability to obtain future credit, but there are still some things that can be done to improve the situation. You must remember that it takes at least a few months for the scores to rise, so be prepared to wait a while before you see your scores increase.
However, it is essential to remember that it is easier said than done. Maintaining a healthy financial situation requires willpower and sensible credit card management. There are thousands of options today with convenient credit card payment offers. But, you must not go for each of them and only get what you need.
Hopefully, the tips mentioned above will help improve your credit score and establish you as a responsible borrower.