There are several different ways you can maintain and improve your credit score. Given the aspirational aspects of today’s world, it would be hard to live debt-free or away from some means of credit. If an individual has such a ` lack of credit history’, it would lead to denial of credit since lenders may not have enough details - a payment history at least – to judge an application. Thus, keeping off credit totally would be equally unwise or as good as having a poor credit score.
A good credit history gets built when one makes regular repayment on loans and credit cards on time. Such a behaviour substantially influences your credit score. Remember to make full payments on such regular commitments so your credit balance (especially on a credit card) remains within your limits. Similarly, never ignore unpaid or overdue bills of any sort. A common mistake is to close old credit cards (in a credit agency’s records) including its repayment history which may take away a supportive case.
If you are planning to take a larger loan like home mortgage, then you must utilise existing credit means judiciously (for example, you may use only 30% of the credit card limit besides keeping multiple cards to have a higher limit). Always consider paying off the credit card bills in full as a consistent payment of minimum amounts due can be considered undesirable by lenders. One must also desist from applying for too much loans at any point in time or with too many lenders for the same loan. Ideally, one must maintain an ideal mix of secured and unsecured loans. Wherever possible, you may consider paying off expensive credit with savings to reduce the burden.
It is often said that a smart consumer is someone who uses the available credit intelligently, including when not to take or use it. One may also add that this smart consumer will become an intelligent one when he or she understands how a lender favours a better credit score which in turn brings beneficial terms and a greater quality of life.
While applying for a loan, lenders normally check one’s credit score and use the information, along with their own policies to determine loan eligibility. The ‘Credit Score’ is a crucial determinant in assessing a customer’s borrowing behaviour. Creditors hence recommend that customers build a credit footprint that will let the banking system evaluate their creditworthiness.
1 Review your credit report on a regular basis
When you make an application for a loan, credit card, mortgage or other type of credit, lenders look at your credit report and may use the information contained within it when making their decision. Review your credit report regularly to make sure it’s up to date and accurately reflects your circumstances as mistakes can hurt your credit rating.
2 Keep up with repayments and pay on time
The most important factor to improve your credit score is to clear all outstanding credit card dues and then start paying back outstanding’s on your loan regularly (month on month). Once a borrower has managed to pay all his outstanding EMIs and has started paying his loan EMIs regularly, his score will start improving.
3 Close unused accounts
Close unused credit accounts if you no longer require them. Lenders can take into account the credit limits available to you, not just what you currently owe.
4 Space out credit applications
A lender will likely check and leave a credit application search footprint on your credit report each time you apply for credit. Space out your credit applications and limit making several applications close together as this could be a sign of financial stress to lenders.
1 No debt never means good credit
In today’s aspirational world, it would be hard to live debt-free even though many do so. However, such ` lack of credit history’ might lead to eventual denial of credit since lenders do not have any evidence of a reliable payment history or responsible behavior on behalf of such individuals. So, if you thought of keeping off credit totally, it would be equally unwise.
2 Ignoring your credit report
Your credit report - a summary of your financial history – helps lenders decide whether to approve your credit request. Thus, if there is any bad remark (due to delayed payment or other aspects) on your credit score, it would be sensible to check the credit report regularly and take corrective steps against misreporting, theft of identity and even accounts that you don’t recognize.
3 Missing regular payments
Though the credit score models have many moving parts, paying your credit obligations regularly is one of the major factors that influences your credit score. Thus, your credit history – otherwise sound – can take a hit even if you miss or delay a single payment, lately. Once a credit line is acquired, it is prudent to remember and set repayment schedules. However, in case of genuine issues, one must contact the lender to avoid being reported to credit rating agencies.
4 Paying minimum on your outstanding
When it comes to paying bills, missing the payment is not the only cardinal mistake that individuals make. Many believe paying the minimum is enough to escape poor remark even though they may end up paying much more than the borrowed amount in interest itself. Thus, it is prudent to keep the utilization to the minimum which in turns makes the repayment easier and utilization ratio better.
5 Getting cash advances on cards
Taking cash advance on credit card – unless in an emergency – is a bad idea since it would carry higher interest rate (than purchases) and transaction fees and offer no grace period. Moreover, the interest on the borrowed sum starts heaping up fast. Therefore, it might be cheaper to pay for the expenses using the credit card than withdrawing money, using it.
6 Applying for too much credit options in one-go
When they are in need of credit, individuals tend to apply to several lenders at once. This in turn will lead to many lenders enquiring about same individual, simultaneously. Such an approach can create a wrong impression that an individual may be seeking to borrow beyond his abilities, hurting the credit score. The ideal way to go is to start with one lender and await the response. Also, if you are planning to seek mortgage, car loan or even appliances on credit, hold back your applications for credit cards for some time.
7 Using too much of available credit
Individuals often overuse or maximize the limit on credit options (especially credit cards) without realizing the potential damage to their credit score. In fact, a lower ratio is better for your credit score. Even a regular payment history would not help as a higher usage is seen as a risky behavior. Thus, a good credit utilization ratio (the actual usage vs accessible credit) is a key factor, determining your creditworthiness hence it is ideal to keep the debt on each credit card around 30% and the overall credit around 10%. This can be achieved by a judicious mix of available options.
8 Closing old credit card accounts
You may think that closing an old credit card is good to improve your prospects for a new one. Wrong. One must understand that your utilization ratio has two elements: outstanding balances and the total available credit. If one of these heads goes up, it leads to higher ratio hence it’s a bad idea to close a credit card account even if you don’t use it. In fact, if you have an older credit card account with a good repayment history, it can truly boost your credit history and therefore your overall score
9 Being a co-borrower without knowing the consequences
It is very common among Indian urban households to borrow jointly (or as a guarantor). However, such a process can weigh down the credit score of both individuals equally since it shows up on their respective credit sheets. And if the principal borrower fails to pay on time or delays obligations, it impacts the other too – being the co-signee. It is therefore advisable that one must be careful about the ability of the prime borrower to repay the credit.
While some of these mistakes can be managed or corrected, some need self-control on the part of individuals to be avoided. Generally, references that lead to weak credit scores and even denial of credit might last for years, but one can always learn from mistakes and take corrective actions including consistent on-time payments, keeping card balances low and seeking fewer new accounts.
Will Credit score increase if I file ITR?
Filing an ITR shows you are a responsible citizen of India and kudos to you on that. A CIBIL score incorporates a number of parameters that relate to your past and current credit pursuits, such as credit cards, personal loans, auto loans, home loans etc. With timely repayments on your debt, your score increases. However, it does not consider whether you have paid your taxes or not. Thus, your CIBIL will remain unaltered with this fine act of yours.
Do bear in mind, ITRs are an important document in your loan docket. It helps establish your disposable income. Since it increases your chances of being approved a loan and also keeps you out of trouble with the tax authorities, it’s best to file it on time.
How long will it take to increase a CIBIL score?
Credit score depends on 5 major factors. If you know where you are lacking, you can work towards improving your CIBIL score yourself. It will take about 2-3 months.
How many months does it take to increase my CIBIL score?
Credit scores are updated every month by banks. But how many months it takes to improve yours depends on where you stand now and where you wish to go with your score. Provide more details and I’ll be able to help you out with some advice.
If you want to know how you can boost your Credit score, check out my answer on another thread where I have shared my personal experience in going from 870 to 619 and then back to 812 in 4 months.
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