- Pay EMIs on time, lower credit use for better scores.
A bad credit score can make it difficult to secure loans for a house, a car, or even a personal emergency. Most banks are reluctant to lend to individuals with scores below 700.
A score above 750, on the other hand, is considered excellent. It gives borrowers access to loans at favourable interest rates. But what exactly is a credit score, and what can you do to improve yours?
What is a Credit Score?
A credit score, also known as a CIBIL score, is a three-digit number, typically between 300 and 900, that tells banks about your financial reliability.
It is a financial report card that banks use to know how likely a person is to repay a loan on time. A score higher than 750 is considered excellent, leading to lower EMIs and higher loan approval rates.
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Common Mistakes that Decrease Credit Score
1. Missed or Late EMI Payments
If you miss or delay an EMI payment, it registers on your credit report, and your credit score drops. Make sure that you pay your EMIs on time without missing even a single instalment.
2. Multiple Loan Inquiries in a Short Period
Each loan application adds up on your credit report. Submitting multiple applications in a short window can decrease your credit score.
3. Closing a Credit Card
Although it may seem like a responsible move, closing a credit card reduces your total available credit limit and shortens your credit history. These changes hit your credit score negatively.
4. Prepaying Your Loan
Paying off the loan before the end of the loan tenure causes a small temporary dip by changing your credit mix. Credit mix is a combination of secured (home, auto) and unsecured (credit cards) credit products displayed on your credit report. Lenders prefer to see a healthy mix on your credit profile.
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How to Improve Your Credit Score?
1. Making on-time payments
Paying EMIs and bills on time signals reliability and financial responsibility to lenders and credit bureaus. This is important to build a positive credit report and improve credit scores.
2. Lowering Credit Utilisation Ratio
Credit card balances should ideally be around 30 per cent of the total available credit limit. Higher credit utilisation indicates financial strain and can impact credit scores. If your credit limit is Rs 1 lakh, try not to spend more than Rs 30,000 in a billing cycle.
3. Retaining Old Accounts
Maintaining old credit accounts, even unused ones, can boost credit scores. A longer credit history is a positive factor in credit scoring models.
4. Avoid New Credit Applications
New applications add hard inquiries to your credit report. Multiple credit applications within a short window destabilise a credit profile and can temporarily decrease credit scores.
5. Check Credit Report Routinely
Check credit scores regularly to review financial progress and spot any errors that could have crept in.
A credit score cannot be improved overnight, but with consistent efforts, you can see improvements within 6 to 12 months.
