Credit score plays an important role in the approval of loan and credit card applications. When a lender or a card issuer receives a credit card or loan application, it calls for his credit report from the credit bureaus to evaluate his credit worthiness.
Credit score plays an important role in the approval of loan and credit card applications. When a lender or a card issuer receives a credit card or loan application, it calls for his credit report from the credit bureaus to evaluate his credit worthiness. A poor credit score may result in outright rejection of the application. If you have been rejected because of a poor credit score, these five financial habits will help you build a strong credit score.
Pay outstanding dues by due date
Debt repayment carries maximum weightage. Thus, timely repayment of your credit card dues and loan EMIs will ensure steady recovery of your credit score. Set standing instructions in your bank accounts to avoid missed repayments.
Contain credit utilisation ratio at 30-40%
Credit utilisation ratio is the proportion of total credit card limit utilised by you. As most lenders see credit utilisation ratio of over 30–40% as a sign of credit hungriness, credit bureaus cut your credit score on breaching this level. If you are frequently breaching this level, request your card issuer(s) to raise your limit(s) or go for an additional credit card to increase your total credit limit.
Check credit report frequently
Credit reports can contain wrong information due to clerical errors made by the credit bureau or the lender, or due to fraudulent credit transactions or applications in your name. The only way to detect them is to review your credit report at periodic intervals. As all credit bureaus are required to provide free credit report at least once a year, distribute your requests for free credit report in such a way so that you have a free credit report at least once in a quarter. Alternatively, visit online lending marketplaces to avail free credit reports and their monthly updates.
Avoid direct loan and credit enquiries with lenders
Credit report requests initiated by lenders are considered as hard enquiries. Credit bureaus include such requests in your credit report and reduce your credit score with each such request. It is better to visit online financial marketplaces compare and select the best option available to you based on your credit score, income and other criterion. Although such marketplaces would also fetch your credit report for providing you the various credit options, their credit report requests are considered as soft queries and do not pull down your credit score.
Maintain a proper credit mix
Credit mix refers to the proportion of secured and unsecured loans. Usually, lenders prefer to lend to those with higher share of secured loans like home loans and car loans, and hence, credit bureaus too score such borrowers favourably. Try to prepay some of your unsecured loans like personal loans, loan against credit card, etc., to increase the share of secured loans. You can also improve your credit mix by replacing unsecured loans with secured ones like gold loan, loan against securities or top-up home loan (in case of existing home loan borrowers). Doing this may reduce your interest burden as secured loans have lower interest rate.
The writer is chief products officer, Paisabazaar.com