A good credit score is among the most important indicators of your financial health, and tells lenders about your attitude towards credit. The higher your credit score, the better your chances of getting approval for a new credit card, line of credit, or even a loan - especially when you need it most.
In an earlier post, we had mentioned the importance of having a credit score, especially for NTC (New To Credit) consumers, and how to build a credit score.
What factors contribute to your credit score?
Payment history is the most influential factor of the bureau score. The logic being that if you are not paying your other loans/credit cards, there is a very high chance that you won’t pay back your new ones. Thus, any delinquency reduces the chances of a new loan/credit card drastically. Other factors that make up your score are credit utilisation, credit history, credit mix, and new credit. Read more about factors affecting your credit score.
7 ways to improve your credit score
Building a credit score is the easier part. Over the years, your usage of credit products determines if your credit score remains high or starts to dip - and that’s where these tips to improve your credit score will come in handy.
1. Make loan and credit card repayment on time
Whether a loan EMI or credit card bill, timely payments are crucial to your credit score, as payment history is the most important ranking factor to calculate your credit score. If you’re forgetful by nature or too busy, set payment reminders for all your outstanding bills and payments, at least 2-3 days in advance of the payment due date, which gives you an additional buffer.
You can also set up automatic bill payments from your bank’s Netbanking option to ensure you do not miss any payments. Most loan EMIs are debited directly from your account as per the mandate you gave the lender, so this reminder will help in ensuring your bank account is sufficiently funded on the EMI date.
2. Keep your credit utilisation low
If you’re someone who likes living life on the edge, this behaviour will severely impact your credit score. Using your credit card to pay for all purchases in order to get discounts, reward points etc is fine, so long as you’re able to repay the entire amount by the payment due date.
However, if you pay only the Minimum Amount Due and keep rolling over the balance to the next month, not only do you incur interest charges but your overall credit utilisation increases.
Try to avoid using beyond 30% of your available credit limit at any time and keep your outstanding balance low across all cards. The lower your credit utilisation, the higher your credit score.
You can also try to request your bank for an increase in the credit limit. If you already have a high credit score, it is possible your bank may also send you an offer saying you’re eligible for a higher limit - and this may lower your credit utilisation. Do note that requesting or accepting the increase in credit limit can have a temporary impact on your credit score, depending on your bank.
3. Get a secured credit card
If you wish to keep using a credit card but repayment of dues is a problem, or you wish to adopt a more disciplined approach, you can get a secured credit card. These credit cards are issued against some form of collateral, generally a Fixed Deposit (FD) held with the issuing bank or financial institution, and have a lower credit limit (usually 75-85% of the collateral amount).
If your previous card/loan applications were declined due to a poor credit score, a secured credit card can help in improving your credit score and credit history - provided you use it responsibly and repay dues in full.
4. Avoid applying for new loans or credit cards unless necessary
Each time you apply for a new loan, line of credit, or a credit card, the lender will access your credit report from one or more credit bureaus. This will be recorded as a “Hard Enquiry”, and too many such hard enquiries can cause your credit score to drop, besides lowering your “credit age”. Apply for a loan or credit card only if absolutely necessary or an emergency.
As a consumer, you can also access your credit score and credit report. This is recorded by the bureaus as a “Soft Enquiry”, and does not affect your score. You can check your FREE credit score from CIBIL and Experian every month on the OneScore app, and this will not affect your credit score.
5. Reporting discrepancies in your credit report
No system is perfect, and it is possible that even with responsible credit behaviour from your side, an error in your credit report could be affecting your credit score.
It is extremely important to check your credit report regularly, as this will help you locate and dispute any errors immediately. In the OneScore app, you can raise a query with the bureau for every item pertaining to any credit product, track the query, and get a resolution from the bureau, once they verify that your concern is valid.
6. Aim for a healthy credit mix
A mix of different credit products is an important ranking factor not just in calculating your credit score, but also in improving your credit score and building a good credit history.
These could be a mix of secured and unsecured loans, credit cards, a line of credit, and so on. This provides an indication of your ability to manage credit in a responsible manner, as well as greater stability, like a home loan.
7. Retain older credit cards
The length of your credit history is another crucial factor in determining your credit score. As you get older and your income increases, there is a tendency to apply for top-end credit cards, and give up the older ones by closing those credit card accounts. However, doing this can affect your credit score.
Even if you apply for new credit cards, try and hold on to your older cards and use them for token purchases once in a while if needed, to keep them active.
💡 Besides checking your FREE CIBIL and Experian credit score and credit report in the OneScore app, you can also use its AI-powered Score Improvement Planner along with personalised tips and suggestions to improve your credit score in 2021. Go on, give it a try!