A high credit score is as much a precursor to a successful future as it is indicative of it. It is quite common now for businesses and even employers to check credit worthiness of individuals. Some have even proposed that it be checked before tying the nuptial knot. So much for “marriages are made in heaven” ;) Hence now is a great time to establish and improve your credit score.
Why is tracking your credit score important?
Tracking your credit score is a lot like watching your weight. Both should be monitored regularly, because if left unchecked, the situation may spiral out of control. Therefore, checking your credit report should be a part of your monthly routine (even though the score may potentially change every day). Further, in case of discrepancies, it will take some time to correct them. For example, if you were to find a low score at the time of the loan application, you may have to wait for 3 to 6 months for the score to change and improve, before reapplying for a loan.
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 utilisation, credit history, a mix of credit and new credit. The below distribution indicates the weight that each factor carries. However, the credit scoring algorithm is proprietary to bureaus and is updated regularly. It will also vary across bureaus.
Bureau Score Factors
Harming your score
Here’s a small quiz to understand if your actions are affecting your score. Keep a tab of the answers, and we will explain the results at the end.
Are your payments often delayed?
As mentioned before, payment history is the single most important factor affecting your score. Even a single delayed payment has the potential of dropping your score by up to 100 score points. Moreover, any missed payment will stay on your history for several years, and will affect your score. If you are falling behind on any of your installments/bills, make those payments as soon as possible.
Has your card usage reached the credit limit?
Your credit card usage plays an almost equivalent role as your payment history. Credit utilisation is a percentage of the amount spent from the overall credit card limit. For eg, if you have one credit card with a imit of ₹1,00,000 and spend of ₹75,000, your credit utilisation ratio is 75%.
The solution: Lower your balances. The lower your utilisation, the higher the score. People with high credit scores typically do not use more than 15% of their available credit. You can also repay the amount once the purchase is done, and before the statement is generated. Another alternative is to request the bank for an increase in the credit limit. If you already have a high credit score, it is possible your bank may also inform you of eligibility for an increase in the limit. A higher credit limit will automatically reduce your credit utilisation, even with the same spends. Do note - requesting or accepting the increase in credit limit can have a temporary impact on your credit score, depending on your bank.
Do you mostly have consumption-based loan products?
The next factor is the mix of credit that you have. Some loan types have been shown to have better customers. For example, a customer with Home Loan will be considered a better customer. A home loan signifies greater stability and financial maturity. Likewise, someone with too many consumer durable loans (for eg. applicances, furniture or electronic items) implies that a person might not be living within their means, and may have a lower score.
Similarly, with an increase in online payments, credit cards have become the preferred method of spending for many consumers. Also, since credit cards are mostly given after proper income checks only, this signifies a potentially dependable customer. To summarise, having a product like Home Loan, Auto Loan and a credit card has a positive effect on your score whereas other products like consumer durable loans, line of credit etc. hurt your score.
Do you keep applying for new loans or credit cards?
Whenever you apply for a new credit card or loan, the bank or lending institution will access your credit report from the bureau(s), who will record this as a “Hard Enquiry”. Too many such hard enquiries will reduce your score.
On the other hand, as a customer, you can also access your credit score and credit report. While this too is noted by the bureaus, it is recorded as a “Soft Enquiry” and does not affect your score.
So, how did you fare in the quiz? If your answer is “Yes” to any of the above questions, that could be a reason for having a low score. Don’t be disheartened, there are ways to improve your credit score.
How to improve your credit score
The first step on your way to a better credit score is to be aware of it. Therefore, it is essential to download the report every month and to scrutinise it in detail. While it may seem daunting at first, this is where the OneScore App comes to your help. It fetches your report every month and shows you all the changes that have happened over time.
Pay on time
Now that you know your score, it’s time for you to start paying all your bills on time. Timely payments are crucial to your credit score, as payment history accounts for a significant piece of your score calculations. An excellent way to begin would be to set payment reminders for all your outstanding bills and payments. You can also set up automatic bill payments from your bank’s Netbanking interface to ensure you do not miss any payments.
No system is perfect, and it is possible that there might be some error in your report. Study your credit report thoroughly and immediately dispute any errors or mistakes that are there. Raising these issues is very important. Take advantage of free credit reports provided by the OneScore App to help you challenge any discrepancies that might come back to haunt you later. The app even allows you to raise a concern, track it and see the resolved report, all without requiring to leave the app.
Limit your applications for new credit cards or loans
Applying for new credit cards/loans impacts your score, and also lowers your average credit age. Every time you apply for a new credit card or loan, you subject your credit report to hard enquiries from lenders. Too many enquiries imply a high requirement of credit. They lower your score and also stay on your record for a while. Hence apply for a loan/credit card only when you need to.
Benefits of improved credit score
Do not waste any more time to start improving your credit score. The higher your score, the lower your interest rates will be and the easier it will be for you to obtain credit, when you actually need it.