The use of credit score is no more limited to just lenders’ evaluating their risk of providing you fresh credit facility or increasing your existing credit limits. They are being increasingly used for evaluating job applications and even for setting interest rates.
If you have a low score, or aiming to transform your good score to a great one, the following tips might help you.
Check report for inaccuracies
Your credit report lists your outstanding loans, EMIs, past credit accounts and your existing credit card balances. As these are used to calculate your credit score, any wrong or incomplete information, either due to clerical errors or due to fraudulent transaction or credit application, can bring down your credit score. Reviewing your credit report at regular intervals will allow you to detect such errors or frauds, and report them to credit bureau and lenders for rectification. A rectified credit report will then automatically post an improved credit score.
Pay your dues on time
Lenders report each default or delays in debt repayments to the credit bureaus, who then include them in your credit report. Although none of the credit bureaus have disclosed the weightage given to various credit criterion during credit score calculation, past debt repayment record is believed to receive the maximum weightage of all. Ensuring timely repayment of dues will steadily improve your credit score.
Use credit cards regularly
Using credit cards for making payments is equivalent to taking loans. Timely repayment of your credit card dues affects your credit score the same way as timely repayment of loan commitments do. Thus, using credit cards and ensuring their timely repayments not only help existing borrowers to improve their credit score, it is also the most convenient way for establishing credit histories for those who have none.
Ensure a healthy credit mix
The composition of your credit mix also affects your credit score. As lenders prefer to lend to those having a higher share of secured loans like home loans and car loans, credit bureaus too score such borrowers higher. Thus, if you are planning to prepay some loan obligations, try prepay the unsecured loans first. Whenever you apply for a loan or a credit card, the lender will request your credit report from the credit bureaus. These requests are considered as hard enquiries and pull down your credit score. Thus, avoid applying directly for loans if you already have a poor credit score.
Monitor your credit utilisation
Credit utilisation ratio is the proportion of your credit card limit availed by you. Try to contain your credit utilisation ratio within 30%–40% of your total credit limit, as exceeding it will make you look like a credit-hungry person. If you are frequently exceeding the 30–40% level, ask your card issuer to raise your credit limit or get another credit card.
Monitor guaranteed loan accounts
Co-signing, guaranteeing or being a joint borrower makes you equally liable for any missed payments or defaults in those credit accounts. Your credit report will carry the same negative affect as the primary or other applicants. Hence, keep an eye on the repayments made in those accounts. Ensuring regular repayments of those accounts will also steadily improve your credit score.
Radhika Binani is chief products officer, Paisabazaar.com