If you own a credit card, your credit score is one of the most important consideration factors. A good credit score will reap various benefits in the longer run. But before we get into details about ways to improve your credit score, let’s discuss its meaning.
What is a Credit Score?
A numeric summary of your credit history is known as a credit score. Commonly, this method is used by lenders to predict the likelihood of repayability of loans by you.
Typically, a credit score ranges between 300 to 850. (Poor to excellent). A high credit score indicates a good payment record with a consistent payment history and on-time payments. On the other hand, a lower credit score indicates over-extended use of credit.
While there are guidelines for each, there are no exact cut-offs for good or bad credit scores. Generally, scores in the range of 750-900 are considered excellent, 650-750 is good, 550-650 is average, and 300-550 is poor.
With time, consumers are becoming increasingly aware of the need for good credit scores. Ultimately, a consistent record improves the financial outlook over time.
Calculation of Credit Score
Every credit agency uses a different method and scoring formula to determine credit scores. While the final scores may vary, all the agencies use the same variables for calculation.
Mainly there are four major credit bureaus in India:
CIBIL, Equifax, Experian and CRIF High Mark. All of these agencies follow different methods for the calculation of credit scores. But, the common factors taken into consideration include:
Payment History
The list of things included in checking your payment history comprises personal loans, credit cards, car loans, home loans and education loans. With this factor, agencies can get information on bankrupcies, defaulting payments and the timeline of your repayments. The algorithm for your credit score calculation considers your amount due, payment history, and frequent completion or missing payments.
Total Number of Accounts
Your credit mix is another factor that impacts your credit score. Your credit score gets a good boost if you have a diversified mix of credit products such as auto, personal, and car loans. Hence, your credit score calculation considers the total number of accounts in your name.
Credit Utilsation Ratio
This ratio measures the total amount of credit used by you against the entire available credit at your disposal. Maintaining a credit utilisation ratio of 30-40% is an excellent way to keep your credit score.
Age of credit
The older your credit card or loan, the better your chances of getting a good credit score. Refrain from closing your old accounts even if you have paid off your debts. Lenders can make an informed choice if you have a long credit history.
While all agencies consider the following factors, the impact of payment history and credit utilisation ratio is relatively high on your credit score. On the other hand, credit age has a medium effect, and the total number of accounts has a low impact.
Easy Tips and Tricks to Improve Your Credit Score
Now that you know your credit score's importance, let’s look at a few ways to improve it.
1. Set Reminders for Disciplined Payment
A complete deal breaker needs to pay your credit card bill or EMIs. To ensure it doesn’t happen to you, decide on a fixed date for every month, set multiple reminders for the specific date and follow up.
2. Keep Your Old Accounts Open
As discussed, the age of credit factor of your credit card score determines the tenure of your credit accounts. Longer the term, the better the score. So, don’t close your older credit accounts and let the records speak about your history.
You may like to read: Credit Insurance: Coverage, Claims, Exclusions and Best Agencies in India
You may like to read: Credit Insurance: Coverage, Claims, Exclusions and Best Agencies in India
3. Customise Your Credit Limit
This practice will help you focus on your credit utilisation ratio. Your credit score should restrict your credit card usage against the available limit. On the contrary, reaching closer to the limit will have the opposite effect. A good rule of thumb is to achieve only 30% utilisation or less.
Secondly, limit your requests for new credit cards and set inquiries for the same.
4. Opt For a Longer Repayment Loan Tenure
Think with the “prevention is better than cure” mindset here. To avoid going failing on a committed payment, opt for longer tenure loans in the first place. This will ensure low EMIs for you to make timely payments. Your credit score will gradually improve when you don’t default, delay, or skip the EMIs.
5. Too Much Debt is Never Good
Maintain a limit on the number of loans you should take during a fixed period. Try to keep it to a minimum. Consider taking another loan only after you have repaid an outstanding one.
If you have a record of multiple loans in a short duration, it shows your cycle of having insufficient funds and affects your credit score.
7. Review Your Credit Reports
Maintain a habit of checking your credit scores regularly to check for errors. While doing so, make sure that you go through soft inquiries. Many banks also offer the facility of free credit monitoring for their customers. Check if you can enrol in this service and keep track of your credit score from time to time.
8. Choose Different Forms of Credit
If you don’t have a record of borrowing funds in the past year, you won’t have any credit history. As a result, your CIBIL score will also be low. To avoid this, ensure a healthy credit mix with secured, unsecured, long and short-term loans. Doing so will help you access future low-interest rates and higher loans.
9. Consolidation of Debts
If you have several debts, consider taking a debt consolidation loan from a credit union or a bank to pay them off. By doing so, you will only have a single repayment to worry about. In addition, if you can get this at a lower interest rate, you will be able to pay off and clear your debts faster. Eventually, this can improve your credit utilisation ratio and your credit score.
Conclusion
Improving your credit score should be an absolute-must goal on your list. If you plan to make a significant purchase or apply for a loan, turning around your credit card score in your favour is very important. Remember that it can take several months for your actions to affect your credit score. So, start today. The sooner you work on it, the sooner you see the results.
