Nowadays, money can be used to purchase anything. Or almost anything. However, not everyone has enough money to do that. And for such people, there are lenders. However, due to the potential risks involved in lending, most financial organizations and lenders have specific criteria to assess a borrower’s ability to repay. This is where a credit score becomes important. Lenders use credit scores to determine if someone is eligible and worth lending money to. Therefore, it is crucial for borrowers to maintain a good credit score.
Your credit score is a key factor in deciding if you can get a loan, credit card, or other types of credit. It’s based on your credit history, like how you’ve borrowed money before and paid it back. A high score means you’re seen as trustworthy with credit, while a low score means you’re seen as not very trustworthy. If you have a low score, lenders might be careful about approving your loan requests because they see you as more likely to have trouble paying it back.
In India, there are four main companies that assign credit scores: Equifax, Experian, CIBIL, and CRIF. These scores range from 300 to 900. If your score is in range 750 to 900, it means you have excellent credit rating and have a higher chance of getting approved for loans that too are competitive and lower rates. A score between 300 and 549 is considered poor, while a score between 550 and 750 is considered fair.
In general, to get the best loan and credit card offers, one should aim for a credit score of 750 or higher.
Therefore, before approaching a lender for borrowing via personal loan, home loan or credit card, always make sure that you have a good credit score. People don’t realize it but it is possible to improve your credit scores by following a few simple steps. Let’s see how you can increase your credit score quickly.
7 Steps to Improve Your Credit Scores
1 – Make Repayments Timely
Make sure you pay your dues (loan EMIs) on time. Paying off your debts has a big effect on your credit score. If you delay making payments on your EMIs (Equated Monthly Installments), it not only results in penalties but also brings down your credit score.
Prioritise your loan repayment to improve your credit score. And if you miss paying EMIs not because you don’t have money but because you forget it, then automate bill payment so that you don’t have to worry about missing due dates and deadlines.
2 – Check for Errors in Credit Report
You should make sure to dispute all errors by visiting the official credit agency website immediately post discover. Monitor your credit score and report regularly to check for any inconsistencies. At times, credit agencies end up making mistakes when it comes to updating your financial records. Due to this incorrect or outdated information is added against your report. So you may have repaid a loan but the report may say you still have some outstanding.
And this is what can reduce your credit score. So as soon as you review your credit report and find data or transactions that do not look correct, act upon the same and report it within 30 days to get them rectified. It is for this reason that it is said to check and review your credit score and report, at least once or twice in a year.
3 – Borrow Only When Needed & Keep Credit Utilization Ratio in Control
Always take a loan or borrow only when it is absolutely necessary. For this make sure you regularly evaluate your expenses and income. If you are financially disciplined, it will help curb expenses and avoid unwanted credit.
Generally, it is advisable to restrict your credit card suage only for essential transactions and ensure that credit utilization ratio is maintained below 30%. For example, let’s say that you have 3 credit cards. One has a Rs 1 lakh credit limit, the second one has Rs 1.5 lakh limit, and the final credit card allows you to borrow Rs 2 lakh. This means you have a total credit limit assigned to you of Rs 4.5 lakh to borrow. Across these three cards collectively, you should not borrow more than 30% or say Rs 1.5 lakh at a given time.
While people in India are generally very careful about credit cards, things are different in developed nations. Recently the credit card debt in USA crossed $1 trillion as per this news article (link).
And given the convenience that credit cards offer, it’s tempting to use that credit line for a shopping spree. But you need to be careful. Having a bit of fun occasionally is fine and I have seen people playing casino games such as roulette, etc. NetBet with credit cards when I visited abroad a few years back. But you should spend only what you can repay back within a month when the bill is due. Otherwise, credit card debt can be very costly.
Related Reading – How is credit card interest calculated?
In general, a low credit utilization ratio will improve your credit score as it is an indication to the lenders that you use your credit judiciously.
4 – Maintain a Healthy Mix of Secured & Unsecured Loans
Maintain a healthy credit mix of secured loans (such as Home Loan, Car Loan) and unsecured loans (such as Personal loan, credit cards, etc.) of a long and short tenor to build a good credit score. In case you apply for and have too many unsecured loans, the banks will see it as a negative sign and may decline your future loan applications.
5 – Avoid Frequent Loan/Credit Applications
Every time you apply for a fresh loan or a new credit card, the lenders will make an enquire for your credit report and all such enquiries get recorded in the credit report. If there are too many such enquiries too fast, then that can result in a drop in your credit score. It will make you see that you are hungry for credit and may not have the capability to repay debt in time.
And if you recently applied for a loan or a credit card and it got rejected, then such rejection information also gets recorded in your credit report. So if you have faced such a rejection very recently, then it is advisable to avoid making fresh applications and instead wait for your credit score to increase first and then apply again.
6 – Monitor Repayment of Loans where you Co-Signed or as Guarantor
Did you know that if you are a joint-holder or guarantor in a loan, then you are you are held equally liable for missed payments. So monitor your co-signed, guaranteed and joint accounts monthly as if your co-borrower misses his/her payment, then their inability to repay might affect your ability to access credit when you need it as well.
So that is how you can ensure that your credit score improves.
How Long Does It Take to Increase Your Credit Score?
There is no fixed timeline to this and there is no one right answer.
How long does it takes to increase your credit scores will depend on what’ exactly is hurting your credit score and then what steps you are taking to improve it.
In the event that your credit score suffers due to a single missed payment, it is possible to rebuild it relatively quickly by bringing your account up to date and consistently making timely payments. However, if you fail to make payments on multiple accounts and fall more than 90 days behind before rectifying the situation, the recovery process is likely to take longer. This effect becomes even more pronounced if your late payments lead to repossession or foreclosure.
Regardless of the scenario, the impact of negative marks will gradually diminish over time. Most negative marks will be removed from your credit reports after 5-7 years, ceasing to affect your credit scores at that point, if not sooner.
So if you have a low credit score and want to increase it, then using the above discussed techniques to improve your credit score soon.