5 things you can do to improve your credit score

Here are 5 things you can do to improve your credit score—benefit from the information given here and become creditworthy!

First things first—what is a credit score?

A credit score is a 3-digit number which ranges from 300-900, 900 being the best score. This number is computed by an approved credit bureau like CIBIL, Equifax or Experian. A credit score acts as a reference point to gauge the credit worthiness of an individual. The score tells a lender how likely you are to pay back a loan based on your past pattern of credit usage and loan repayment behavior.

Your credit score is a tool for lenders to check your credit worthiness and capacity to repay loans. Lenders typically look for a credit score of 750 and above to sanction your loan application.

How is the credit score calculated?

Credit score is calculated by the bureaus who collect and maintain loan and credit related transaction information of the users. Your score is arrived at based on all your credit-related activity within the financial system. Member banks and other financial institutions of the credit bureaus submit credit information on their customers on a periodic (usually monthly) basis. This includes details of all payments including any late or missed payments, loans and credit card applications approved, credit limit and credit utilization ratio, and status of credit accounts (including ‘Settled’ or ‘Written Off’ accounts) among other information. All this data is then subject to complex mathematical analysis and your 3-digit credit score is calculated.

Why do credit scores obtained from the three agencies differ from each other?

Each credit bureau uses its own mathematical formulae with different weightages given to the various component factors. In general, however, about one third of your credit score is made up of your repayment history. Your track record on repaying your loan obligations is the most important factor in your credit score.

Importance of your credit score in the loan-approval process:

Generally, a credit score of 750 and above is considered a good score as it indicates that you are responsible with credit. A low credit score signifies that you do not have a good history of making repayments and have a higher probability of default. Therefore, it is always good to have a healthy credit score.

Advantages of a high credit score include:

• Simple Documentation
• Lower interest rate
• Bigger loan amount
• Longer tenure
• Higher card limit (in case of credit cards)

If your credit score is on the lower side, you need not fret. By following measured steps, you can improve your score in a matter of 4-12 months, depending on the severity of your credit situation. These tips can push your score in the right direction. You can choose to get professional assistance or choose to do it on your own.

5 things you can do to improve your credit score

1. Remove Inconsistencies in your credit report

The first thing you need to do is to obtain a copy of your credit report, and carefully scan it for any inconsistencies which might be bringing down your credit score. Look for the following while scanning your credit report:

• Incorrect/ misspelled names
• Unfamiliar addresses, company names and phone numbers
• Previous loans incorrectly stated as “settled”
• Incorrect loan amounts

Do note that disputes in the credit report take 30-45 days to be resolved

2. Pay your bills on time

Delay in payments is another major cause for a low credit score. Paying off all your bills on time and in full is a major contributor to a good credit score. Making a single late or partial payment or even skipping a payment has a negative effect on your credit score. Even if the amount you owe is small, make sure you pay it off diligently, as the consequences for your score are big.

3. Keep your credit balances low

Utilizing too much of credit also leads to a low credit score, as it indicates you are "credit hungry." Make sure that you don’t exceed more than 50% of your available credit limit. This helps you to keep your credit utilization ratio (the proportion between your actual spending and your credit limit) at a lower rate and has a positive impact on your score. A bigger credit utilization ratio implies lack of spending discipline and will bring your credit score down.

4. Apply for new accounts only when needed

Do not apply for credit when you don’t need it. Every time you apply for credit (whether a loan or credit card) it results in a “hard enquiry” by lenders. Multiple hard enquiries in your credit report reflect that you are “hungry” for credit and may not be able to fulfil your debt obligations. Your credit score takes a hit as a result.

5. Have a balanced loan portfolio

Though a small yet significant contributor to a credit score, make sure you have a balance between secured loans (loans borrowed against a security, like a loan against property of auto loan) and unsecured loans (loans borrowed without any security like a personal loan/credit card).

It is very much possible to improve your credit score and become eligible for loans. However, nothing will change at all if you only sit on the couch and worry! All you need to do is to follow the mentioned tips, and make sure you consistently follow these steps till you achieve your desired score.

How long does it take to rebuild my credit score?

There is no fixed time for rebuilding your score. Naturally, the lower your score, the longer it will take to reach the desired level. There is no overnight quick fix for improving your score, but it is akin to improving your fitness, improving your credit score takes some patience, change in habits, and self-discipline to see results.