Looking to apply for a loan? Then, you must know that your credit score is the first thing that banks will look at. This is especially important if you want a loan with no collateral. Now, credit score has become an important criterion for granting credit cards too. The higher your credit score, the greater your chances of getting that loan or lower the chances of your loan application getting rejected. That is why you need to ensure that your credit score is good always.
Maintaining a good score is not very tough if you know how. All you need to do is understand how a credit score is calculated, the related elements and ensuring that you use credit responsibly. Let’s tell you all about it.
A Credit Score
In simple terms, credit score is a three-digit score that is based on your credit history. The more responsibly you have managed your credit, the better will be your score. Essentially, this score is calculated by assessing your financial transactions that involve credit/loans.
You can expect to have a higher score if you have always paid back all your loans on time. Credit information companies such as CIBIL and Experian collect information from banks on an individual’s credit history and grant a score based on it.
Usually, credit scores range between 300 and 850. If you have a score below 500 it is considered a bad score. Similarly, any score over 650 is considered to be good. However, if you have never borrowed or used a credit card, your score might be nil.
How to improve your score
Pay in full rather than the minimum due
Pay only the minimum due on your credit card often? This might be one of the reasons why your score is low. Start paying the full bill amount on your credit cards on time and your score is bound to go up. Remember, every time you pay your credit card bill on time, your score improves. You can even split the bill into two and pay your credit card bills twice a month. This way you would have paid a part of the bill by the due date and you can pay the rest just before the due date.
Don’t cancel old credit cards
The older your credit history, the better for your credit score. So, don’t close your old credit cards. Use them to pay utility bills, make small purchases and improve your credit score.
Don’t apply for too many loans
Don’t apply for too many loans or credit cards at the same time. Every time you apply for these, the bank will check your credit score. This check is known as a hard enquiry. Every hard enquiry lowers your credit score. Also, if your loan or credit card application gets rejected that will also adversely affect your credit score. So, a good gap between applications is needed.
Don’t prematurely pay off loans
Another way you can improve your credit score is by not prematurely paying off your loans. The credit score is based on your loan repayment history. The longer that history the better for your credit score. No loan would mean no repayment and this means there is no way of ensuring that your credit score improves.
Increase your credit card limit
Want a simple way to boost your score? Get a higher credit limit on your credit card. Generally, credit bureaus need you to maintain a credit utilisation ratio of 30% for your credit card. Credit utilisation ratio is the ratio of your credit card spend to your credit limit. This means that you need to use only up to 30% of your credit limit if you want a good score. If you increase your credit limit, your utilisation ratio will fall. So, your score will be higher. Simple, isn’t it? You can also consider using two or more credit cards for making purchases so that you always maintain a good credit utilisation ratio on all your credit cards.
A myth doing the rounds is that if you do a balance transfer from one card issuer to another, your credit score will improve. This isn’t true. You need to pay bills in full, on time to improve your score. You can use balance transfer as an option if a card issuer is offering interest-free period for your balance. You can use this period to pay back your outstanding bills.
The most important point is that you should have different types of credit for a higher score. So, a mix of home loan, personal loan and credit cards will give you a better score than having a home loan alone. Follow these simple steps and your score will surely improve in the long run. Be sure to check your credit score at least once a year. This doesn’t affect your credit score in any way.