Want to improve credit score? Here’s how income tax payment can help you

Paying tax is something you might not like, but what if it helps you in getting credit easily from the banks and other financial institutions in the case of your emergency needs or other financial responsibilities like a child's higher education?

Credit score improvement can be done in various ways, like timely debt payment, not bouncing EMIs, staying up to date with credit utilisation ratio, and whatnot. But paying taxes is the most underrated among all of them.

It not only shows you as a socially responsible person but also indicates an increment in your income sources, which gives credit score agencies a positive impact on your financial capabilities. Here are three ways which paying income tax helps you in improving credit score

Positive payment history: Making timely tax payments can improve your payment history, which accounts for 35% of your credit score. Late payments and missed payments can have a significant negative impact on your credit score, while a history of on-time payments can improve your credit worthiness and increase your credit score.

Improved financial stability: Paying more taxes than you owe can also demonstrate to lenders that you have a stable financial situation. Lenders want to lend to borrowers who have a stable income and are able to repay their debts on time. By paying more taxes, you can show lenders that you are financially responsible and have the means to manage your debts.

Indicates entering the high-income category: Paying more income tax indicates that you are entering the high-income category and working towards earning more income than before. It helps you in improving your credit score and you will become eligible to take more credit than before. The more money you have, the more financially stable you are to repay the amount you have taken as a loan from the banks and other financial institutions.

Be consistent towards tax payment: However, paying more taxes is not a one-time trick to be eligible for more credit. You have to be consistent with the tax payments in further assessment years. If you have paid less income tax in further years, it will negatively impact your credit score as well. It will indicate to financial institutions that you have no uniformity in income sources.

Paying more taxes than you owe can have a positive impact on your credit score by reducing your credit utilisation, improving your payment history, lowering your DTI ratio, and demonstrating financial stability.

However, it is important to maintain a balance between paying taxes and managing your finances effectively. If you are unsure about your tax situation or how to improve your credit score, it may be helpful to seek the advice of a financial professional.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

Disclaimer: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.