A credit score is a rating that credit agencies give you. They share the same information with banks and lenders who may want to offer a loan for you. Your credit score is a three-digit number that lenders use to decide how likely you are to repay on time if they extend you a loan.
A good credit score plays a crucial role when availing a loan or a credit card. If you’re looking to know how to improve your credit score, it won’t happen overnight. Credit score or credit rating consider years of past payment behaviour and not just your current financial condition.
The best approach to boost your credit score is to manage it responsibly. Start with checking your credit score online, which is available for free. Some of the free mobile apps including the one offered by BankBazaar, offer to check your credit score online without hassle.
If your credit history has not improved your credit score, then the following simple tips will help you start the process of improving your credit score.
1.Setup Bill Payment Reminders
Lenders review your credit report and they’re very interested in understanding how reliable you are when it comes to paying your monthly bills. This way they’re able to consider your application for a credit card or a loan by knowing your past payment performance, which is usually considered a good indication for future performance.
You can positively impact this credit rating parameter by paying your monthly bills on time as agreed. Your score could be negatively affected by paying late or settling a credit card outstanding amount for less than agreed.
Set up payment reminders to help you pay off not just loans or credit card balance, but even your utility bills such as rent, phone, etc. If you’re behind the payment due date, bring them to current at the earliest. Although late or missed payments impact your rating negatively, over time it loses effect over more recent times.
2.Dispute any Errors in Your Credit Report
The credit report offers an insight into your past payment behaviour and the different kind of financial products utilised. However, it’s imperative that you check for any errors or discrepancies. Incorrect information can decline your credit score. Verify each of the credit accounts listed on the credit report and get it corrected if there are any inaccuracies.
3.Apply for a Small Loan
If your credit rating is good, but not good enough to get you a lower interest rate, you may want to improve the score by taking a small loan amount and repaying it as agreed with the creditor. By adding a positive payment behaviour through this small loan, it helps your credit history. Also, this will add to your credit mix thereby influencing the credit score positively.
4.Focus on Your Credit Card Total Outstanding Amount
Another important factor influencing your credit history is the credit utilisation ratio. It’s calculated by adding all your credit card balances and dividing it by your total credit limit. Lenders prefer to offer a credit card or a loan to an individual with credit utilisation ratio under 30%. For example, if your credit limit is Rs.1,00,000, then your revolving credit utilisation ratio should be not more than Rs.30,000.
This helps lenders know that you managed credit well and have not maxed out the credit limit. You can improve your credit utilisation ratio by paying off your debt and keeping credit card balances low. Remember that the interest rate on credit card balances is the highest among other credit products. It makes sense to pay off the balances and you could save you some money as well. The faster you make those payments the faster the credit score improves.
5.Ask for an Increment of Your Credit Limit
This approach doesn’t involve paying off your debt or any other traditional methods of boosting your credit rating. Since credit score is influenced by the difference between your credit limit and the amount of credit utilised, an increase in your credit limit will improve your credit score. By this method, you invariably increase the distance between the amount you can borrow and the amount you actually utilised. The more the distance between these two parameters, the higher the credit score.
6.Use Various Types of Credit Products
A good credit mix is another important factor which will boost your credit score. Lenders would like to know how well you handle different types of credit products. Also, if you have multiple credit cards or old loan accounts, do not close them. Utilise all these products prudently and pay their bills on time. A revolving credit, where credit limit is utilised and payments are done on time, improves your payment behaviour and in turn your credit score.
That said, make sure you don’t open too many accounts which could dilute you, as lenders consider multiple applications for credit cards negatively. While credit mix doesn’t have the biggest influence in improving your credit score, it does give you a decent increase in your credit rating. By having a strong credit mix will help you gradually boost your credit score over time.
7.Be Persistent and Patient
While persistence and patience might not be primary factors used to calculate your credit rating, it’s essential to have these two principles in repairing your credit score. Your credit rating didn’t become poor overnight, so don’t expect it to increase immediately.
Continue to pay off your debts on time each month and over time you’ll see the fruits of your persistence and patience. While it’s okay to save some money through your saving account for that important purchase, don’t neglect the regular bills that you need to pay off.
Now that you have a fair understanding about how to improve your credit score, you might wonder how long it takes to boost your credit score. If your credit report reflects negative information, you should pay your bills and await your scores to improve. Time is the key to a good credit score. There’s no short cut to help boost the credit score.
In conclusion, a good credit score can open up a wide range of opportunities. From helping you get the best interest rates and tenure when you avail a credit card or a loan to impacting your future goals, a good credit rating always comes to your aid when you need it the most.
Keep in mind the primary factors which influences your credit score are payment history, credit utilisation ratio, credit age and credit mix. Each of these factors is influential in improving your credit score over time.