Credit score is one of the first filters factored in by lenders while evaluating loan and credit card applications.
Credit score is one of the first filters factored in by lenders while evaluating loan and credit card applications. Some lenders have also extend risk based pricing based on the applicant’s credit score. All this makes it imperative for us to adopt the right financial habits for a strong credit score.
Here are five financial habits that will ensure you are credit ready whenever the need arises:
#Habit 1: Timely repay your credit card bills and loan EMIs
Lenders usually prefer lending to those who follow a disciplined approach in repaying debts. Credit bureaus too are widely believed to give maximum weightage to consumer’s loan and credit card repayment history while computing credit score. Hence, ensure timely and regular repayments of outstanding dues. Keep in mind that any irregularity in loan and credit card repayment gets reflected in your credit report, thereby lowering your credit score. A low credit score would in turn damage your future loan and credit card eligibility, as well as approval chances.
#Habit 2: Contain your credit utilization ratio (CUR) within 30%
CUR refers to the proportion of total credit limit utilized by you. Since lenders generally consider a credit utilization ratio of over 30% as a sign of credit hungriness, credit bureaus may pull down your credit score by a few points on breaching this mark.
If you frequently tend to breach this level, either consider requesting your credit card issuer to increase your credit limit, or avail another credit card. This can help increase your total credit limit and lower your CUR, provided you do not increase your credit card spends.
#Habit 3: Periodically review your credit report
Bureaus compute credit score primarily on the basis of information provided in your credit report by the lenders and credit card issuers. Incorrect information in your credit report can damage your credit score. Such inaccuracies – be it clerical error on the part of the bureau or lender/card issuer, or a possible fraudulent credit transaction – can only be identified if you review your credit report regularly, ideally at least once every three months.
You can pull out one free credit report annually from each of the four credit bureaus in India. Alternatively, you can visit online financial marketplaces to fetch your free credit report along with their free monthly updates as well.
#Habit 4: Avoid multiple credit enquiries to lenders within short time span
Every time you directly apply for any form of credit, the lender assesses your creditworthiness by fetching your credit report from the credit bureaus. Such lender initiated credit report requests are termed as a hard enquiry by the credit bureaus, and gets listed in your credit report. This can pull your credit score down by some points.
Instead of submitting multiple credit enquiries to lenders, especially within a short span of time, consider visiting an online financial marketplace to compare and choose the most suitable lender on the basis of your financial requirement and eligibility criterion set by the lender.
#Habit 5: Do not forget to regularly monitor co-signed/ guaranteed loan accounts
Becoming a co-signer or a loan guarantor makes you equally liable to pay off the EMIs on time. Any delay or default in clearing the dues on time would not only affect the credit score of the primary borrower, it can also lower the credit score of the co-signer or guarantor.
It’s, therefore, vital to regularly review the repayment activities in your co-signed/guaranteed loan account(s), to prevent your credit score from getting damaged due to someone else’s financial indiscipline.
(By Radhika Binani, Chief Product Officer, Paisabazaar.com)