Credit score is not just a number but a reflection of your financial health and creditworthiness. Having no or low credit score can mean loan denial when faced by a pressing need for funds. By taking small but significant steps, you can not only maintain a healthy credit history, but also slowly improve your credit score in the long run.
Here are five simple ways in which you can get there and live a financially disciplined life.
Have a credit history
Credit is not a terrible thing. It’s not a bad word. To reveal your creditworthiness, you must have a history of timely repayment of previous credits. A long-term history of such repayments reflects upon your long-term financial robustness. Check if you have an existing credit score, and if not, apply for a credit card or a loan to initiate your credit history. The only thing as bad as having a low-credit score is having no credit score.
Keep a tab on credit score
When was the last time you checked your credit score? People do not bother about their credit score till they are in need of a loan. But if your credit score check provides an adverse finding
during your loan application, you may be denied the loan, or be provided a loan at a high interest rate. At that stage, it would be too late to attempt to fix a poor credit score. Fixing it requires time and effort. Therefore, check your credit score periodically, know what it is, fix it if it’s on the lower side, and go into your loan application with confidence.
Have a mix of credits
Your credit score is made up of various parameters, including credit usage, type of credit, enquiries made into your credit history, etc. Ensure that you engage with lenders on all the financial parameters that make up your credit score but in a balanced manner. From credit cards to automobile loans to longer tenure home loans to credit limit for business, diversify your credit utilisation as far as possible.
Make optimal use of credit limits
Maintain a healthy credit utilisation ratio, which is a ratio of available credit to used credit. Strive to ensure that your credit utilisation ratio remains below a threshold of 30% to maintain your credit score in a healthy state. For example, if you have a credit limit of R50,000 on your card and you are using R35,000 each month, your credit utilisation ratio is as high as 70%, which will impact your credit score negatively.
Think twice before closing credit cards
For someone having multiple credit cards, closing one card may appear to be a good thing. While controlled use of credit is a good thing and prevents unnecessary expenditure, getting rid of a card may mean a steep rise in your credit utilisation ratio. For example, you have two credit cards each with a spending limit of R50,000, implying a total credit availability of R1,00,000. Your total card use per month is R20,000, implying a credit utilisation ratio of 20%. But if you get rid of one card, the ratio rises to 40%, and this will hurt your credit score. Therefore, maintaining balanced use of credit between multiple cards is not a bad thing at all.
The writer is CEO of BankBazaar.com