Improving your credit score is something that banks and NBFCs look favourably on, as it means that you are a responsible person fiscally and that lending to you would be safe.
Experts give their advice on how to improve your credit score so that the (fiscal) sun shines down on you.
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“A clean repayment history is the most crucial element for a good credit score,” advices Sanjeet Dawar, Managing Director, CRIF High Mark. Plan and ensure timely payments of your Equated Monthly Instalments (EMIs) and at least the minimum payment due on your credit cards.
The time of default also plays a vital role in the computation of a credit score. Any recent defaults are considered more severe than the older ones. Therefore, in the event of default, you need to build a good credit repayment history post the default to improve your credit score over a period.
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“Repay your credit card outstanding (dues) fully as much as possible,” says Ashish Tiwari, Chief Marketing Officer, Home Credit India. In case in some months you are not able to pay fully, do ensure you pay the minimum amount due on time.
Pay off the outstanding balance as soon as you have the funds. Large outstanding amounts on credit card or any revolving loan held for longer periods have a negative impact on your credit score as does over utilisation of the credit limit.
One should never exhaust the limit of their credit card/ revolving credit lines. Tiwari suggests that it is ideal to keep the average credit utilisation ratio around 50%. For example, if you have a credit card with a limit of ₹100,000, for a month if you have used ₹80,000, and next month you have used ₹20,000, your average utilisation is 50% for 2 months.
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Please take care in the pace at which you are borrowing. Frequent borrowings will build your credit balances rapidly and can indicate a risk of leverage.
Conversely, consistent or rapid reduction in balances indicates a reduction in the borrower’s indebtedness. It is advisable to pre-pay or foreclose your loans as and when you can, experts advice.
Next, be aware of the number of open credit lines, having too many credit cards or revolving credit lines works negatively for the credit score. Experts advise having 1 or 2 credit cards.
Additionally, be careful of applying for new credit, including new credit cards, EMI cards, or personal loans. Too many applications in a short period can lower your overall credit score because each application results in a hard inquiry on your credit report, and too many inquiries indicate a lack of funds on the consumer’s end.
Also, regularly review your credit reports and dispute any errors, as inaccuracies can negatively impact your score.
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Be careful as some e-commerce websites assign customers a certain amount of instant credit without their knowledge or actively communicating to the customer, which can reflect in the overall credit report. “Therefore, it is crucial to actively check your credit reports and active accounts and report any inaccuracies to the bureau to avoid any negative impact on your overall score,” says Tiwari.
A spurt of inquiries in a short span of time may be related to credit hunger or financial distress. “It is important to plan and select a suitable lending institution for your needs and avoid multiple applications with different lenders for the same requirement,” says Dawar.
Manik Kumar Malakar is a personal finance writer.
