How to Improve our Credit Score

credit score

Credit score or credit rating is one of the most important metrics of your financial health. It determines how well you are maintaining your credit. A good credit score helps you to secure loans easily and with the best offers, whereas a bad credit score lowers your chance of availing any credit instrument, be it a credit card or any type of loan. Banks and other lending institutions prefer individuals that have a good credit score as it is the reflection of a well managed credit history. 

Since your credit score determines your ability to secure any form of credit, it is imperative to maintain a good credit score. There are a number of ways of increasing your credit score. Here we are going to learn in detail about how you can improve your credit score and what are the benefits of the best credit score.

What is a Good Credit Score?

A good credit score is a reflection of your credit management. It shows how well you have managed your credit such as credit cards, loans, etc. There are several credit rating bureaus that prepare credit reports based on which the individuals are rated with a number usually ranging from 300 to 900. This number is known as the credit score. There are four major credit rating bureaus- Experian, Equifax, TransUnion Cibil, and CRIF. They review your credit history and prepare your credit report based on which you are rated with a credit score. 

Different credit bureaus have slightly different criteria for rating individuals. However, a credit score closer to 900 is considered to be good, and a score near 300 to be poor. 

Factors that Affect Your Credit Score

As said, there are a number of factors that affect your credit score. Credit rating agencies take all these into account while preparing your credit report.

  • Repayment History: The most important factor that affects your credit score is your repayment history. Whether you have paid off credit card bills, or loan EMIs on time or not have a great impact on your credit rating. 
  • Number of Credit Accounts: The number of lines of credit or loan accounts affects your credit rating. Usually, a higher number of credit cards and loan accounts have a negative impact on your credit score, and vice versa.
  • Age of Credit History: The age of your credit history also has a high impact on your credit score. It is seen that individuals with a longer credit history have high credit scores than the ones having a shorter credit history.
  • Number of Credit Enquiries Made: Your frequency of applying for credit cards or loans also impact your credit score. Making frequent credit inquiries is generally considered to be a poor financial habit by credit rating agencies.
  • Type of Credit Availed: There are usually two types of credits/loans- secured and unsecured. The weightage of secured and unsecured credits/loans in your credit history also determines your credit score.

How to Improve Credit Score

We have understood that a good credit score is important to avail loans and other credit facilities easily and with the best interest rates. If it happens to you that your credit score is not enough impressive or even if you have a good credit score but want to increase it further, you should follow the below mentioned tips to improve your credit score:

Make Timely Payment of Credit Card Bills and Loan EMIs

Since your repayment history is the primary factor determining your credit score, you should always pay your loan EMIs and credit card bills on time. Delay in credit repayment can impact your credit score severely and it is considered as a very poor finance habit by credit rating agencies. Pay all your bills and EMIs before their due date. Prioritize their payment while budgeting your monthly expenses. You can keep reminders for such payments or can automate payments before their due date. This will help you have a cent per cent repayment history and improve your credit score significantly.

Avoid Having Too Many Active Credit Accounts

The second point of the answer to your question of how to increase credit score is by having a very limited number of open credit accounts. You should have more than 2-3 active credit accounts. One credit card and one open loan account is generally considered to be ideal for maintaining and improving your credit score in the long run. Apply for a new loan only after closing an existing one. This is taken very positively by credit bureaus as it reflects that you are well aware of your liabilities. 

Have a Mixed Bag of Secured and Unsecured Credits

Availing secured credit instruments such as home loans, mortgage loans, gold loans, secured credit cards generally have a good impact on your credit health and help to increase your credit rating. On the other hand, having too many unsecured credit instruments such as personal loans, unsecured credit cards, etc., can hamper your credit score. Although unsecured credit instruments cannot be avoided by every individual, it is therefore recommended to create a mixed bag with both secured and unsecured credits. For example, if you have a fixed deposit account in a bank, you can take advantage of the same and take a secured credit card instead of an unsecured one. 

Try to Have a Longer Credit History

Suppose you have just landed a job and the bank in which you have a salary account has offered you a credit card. You are not well aware of credit card features at that time so you took the card without inquiring about its benefits. However, after a few months or years, you came to realize that your first credit card is not offering enough benefits as the newer ones in the market and you started giving a thought to surrender it and avail a new one. However, this will be a very poor financial decision because your first credit card helps you to maintain a longer credit age. A longer credit age is generally considered to be good by credit bureaus as it shows that you have a good history of maintaining credits. Therefore, instead of surrendering your oldest credit card, you can ask your bank to upgrade it.

Maintain a Healthy Credit Utilization Ratio

Credit utilization ratio means how much credit you are using from the available credit limit. Suppose you have a credit card with a credit limit of Rs 1 lakh and you are using the entire limit every cycle. This heavy utilization of the available credit limit affects your credit rating negatively. Ideally, you should not use more than 30-40% of the available credit limit. You can ask your credit card provider to increase the credit limit so that you can use more without exceeding 30-40% of the total available credit limit. 

Opt for a Longer Loan Tenure

While availing a loan, always try to opt for a longer repayment period. A longer repayment tenure will reduce your monthly EMI amount so that you can easily repay the loan without having a heavy burden. This will help you in making timely payments and increase your credit score.

Do Not Make Too Many Credit Enquiries

Apply for a loan or a credit card only when you actually need it. Do not make frequent credit enquiries haphazardly. Individuals making too many credit enquiries at a time are considered to be impatient borrowers who cannot handle and manage their credits well. Before applying for a loan or credit card, always ensure that you are eligible for the same and the chances of getting the credit approved is high. By doing this, you can avoid making multiple credit enquiries and protect your credit score from getting hampered.

Credit Your Credit Score Regularly

Make a habit of checking your credit score regularly and ensure whether everything is going well. To answer what is the best way to improve your credit score, you should keep a regular look at your credit score and check if all the information shown is correct or not. In case there is any discrepancy, inform the credit bureau and get the misinformation rectified immediately. Checking your credit score regularly will also help you to find the factors that have positive and negative impacts on your credit health. You can thus work to improve upon the same to increase your credit score.

How to Check Credit Score

How to get credit score? Well, you can do this easily through a number of websites where you can provide a few basic information and get your credit score instantly. Also, checking your credit score regularly will not have any negative impact on it because it is considered a soft enquiry. You only need to fill in a few basic personal information like your name, mobile number, email address, PAN, etc., in order to get your credit score.

To conclude, the credit score is the key parameter that shows your credit worthiness and makes you eligible for different types of credits. With a good credit score, you will be able to secure the best credit offers whenever necessary. Do remember to follow all the aforementioned tips in order to improve your credit rating. However, remember that following these steps is not going to increase your credit score overnight. All these are good credit management habits that you can follow to maintain and improve your credit score in the long run. 

  • Can I get a loan without a credit score?
  • Is a home loan a secured loan?
  • My credit card limit is Rs 1 lakh, how much can I use?
  • Can I check my credit score regularly without hampering it?
  • I have a 5 year old credit card but it does not offer me enough benefits. Shall I surrender it?
  • Can I make a prepayment and foreclosure loan early to increase my credit score?
  • How many personal loans can I take?
  • Why is my credit score different from different credit bureaus?