Are you worried about your credit score? Worried that your personal loan request might be declined because of your somewhat embarrassing credit score?
Luckily, credit scores are not cast in stone. You can improve your credit score with a pinch of discipline and a dash of patience. But before we go into how to raise your credit score, let’s get an understanding of what a credit score is and why it matters.
What is a Credit Score and Why Does It Matter?
Your credit score is like your school report card. It’s a performance record. Just as you are graded on how you did on unit tests and exams, your credit report and score grades you on how well you have handled your debt/loans/credit cards. Your credit score helps a lender determine your creditworthiness for a loan or credit card. The higher it is, the higher the chances of your loan being approved and higher the chances of you getting a favourable interest rate. Your high score tells your potential lender that you are not a risky bet – you are reliable and will repay a loan if given to you. Banks rely on credit scores more and more because they are the fastest and most economical way for them to identify good customers. It is good for you because this makes the loan approval process much faster.
However, credit score is just a part of your credit report and it gives equal weightage to a lot of other credit behaviors.
My Score is Low, So Now What?
While it is very true that you need to start working on a good credit score right from your very first loan, it is never too late to change.
Here are 7 easy ways to raise your credit score:
1. Keep Your Credit Card Balance Low
When it comes to giving loans, banks prefer customers with no or low default history. If you want to ensure a good credit score, keep track of your credit cards and the balance on all of them. Check to see if your credit card allows you to repay multiple times over the course of the month. That way if by the end of the month you feel you can repay some more of your balance, then do that. An easy way to keep these balances in check is by keeping one to two credit cards only. This eliminates small balances spread out under multiple credit cards.
2. Avoid Impulsive Buying
Avoid unnecessary purchases, out of impulse. Think twice before you give into that voice that is pleading you to buy that purse or that cool tech-toy you feel you simply must have. Can you afford it? Do you really need it? What will happen if you defer purchase by a month or two? Prioritising and budgeting your luxury expenses will guide you well without overshooting your credit card debt. Giving into your impulses may hamper your credit report in the long run.
3. Look For Mistakes in Your Report
Be up-to-date with your credit report. Check to make sure that you are not being penalised unnecessarily. If your credit report claims you have made late payments while you can prove that you haven’t, make sure that you highlight the error and get it rectified. In India, credit scores are computed by Credit Information Bureau (India) Ltd; also known as CIBIL. To know your CIBIL score, you can request your credit report online by paying a one time fee. You can also apply for credit repair through their online dispute resolution process at no extra cost.
4. Pay Your Bills on Time
Circle your due date on a calendar or put a reminder on your phone so that you do not forget when you need to make your next payment because delinquent payment/collections can impact your credit score negatively. Repay, even the small amounts, so that they do not compound into a major headache later. Having a regular payment history with no outstanding amount is a sure shot way to raise your credit score. Taking new loans to repay old bills is not advisable. Being disciplined is the smarter way out.
5. Consider Getting a Secured Credit Card
Secured credit cards provide you credit against a fixed deposit you have maintained with the bank. That way, the bank does not incur any risk while issuing you a credit card and it does wonders to your credit score. Most of the leading banks offer a secured card for their customers. Make sure the bank reports your account history to CIBIL.
6. Limit Your Number of Credit Cards
Do not apply for too many cards just because of offers like discounts on purchases or free movie tickets, etc. Any benefits you may gain in the beginning is easily offset by the high-interest rates that these cards charge you. Instead, apply for credit only when you really need it. Also, the fewer your number of cards, the easier to keep track of payments and due dates.
7. Diversify Your Credit Type
It is a good idea to look into diverse forms of credit – installment based credit like car loans, and revolving credit like credit cards. Having a variety of credit types can help boost your credit score by indicating how you as a consumer have managed the different accounts. Hence it is important to handle all the accounts responsibly by timely repayments.
How Long Does Will it Take to Raise Your Credit Score?
After all your hard work, you might get a little impatient waiting for your efforts to bear fruit. But be patient. Average time to raise your credit score would be 12 to 18 months. Of course, the lower your score the longer it takes to bring it back up.
By working towards a good credit score, you are not only making it easier for you to get loans in future but are also setting yourself up to lead a fiscally healthy life. All you need is a little discipline, a little patience and some amount of determination in order to raise your credit score.