If you have a credit card or are planning to get one, it is crucial to understand credit scores, as they determine your future financing options. A good credit score makes it easier to apply for loans with lower interest rates, while a poor credit score can lower your chances of obtaining a loan. However, a bad credit score does not necessarily mean that a user cannot repay their dues.
A credit score reflects your creditworthiness or ability to repay borrowed amounts. It is often represented as a CIBIL score, which is a three-digit number ranging from 300 to 900. Banks calculate the CIBIL score based on your credit history, repayment history, and credit utilization ratio.
Generally, a credit score of 750 or higher is considered good, making it easier to secure debt approval. However, many users are unaware of how to improve their credit scores. Therefore, it is essential to learn a few strategies for maintaining a good credit score.
One of the most critical factors influencing your credit score is the accuracy of your credit report. Regularly check your CIBIL report for any errors or discrepancies that may negatively impact your score. If you find any inaccuracies, report them to your credit card issuing bank for resolution. Monitoring your credit report periodically will help maintain your score.
A balanced mix of credit is important for sustaining a good credit score. Your credit portfolio should include a variety of loans with different risk factors. Unsecured loans, such as personal, business, and education loans, can be riskier and may lower your score. To protect your credit score, limit the number of loans you take out at one time.
Failing to pay your credit card bills by the due date can significantly lower your credit score. Late payments not only incur high-interest charges but can also lead to late fees and penalties. To avoid missing payments, consider setting up automatic payments. Consistent delays in credit card bill payments may reduce your credit limit, which can restrict your future spending capacity.
To maintain a healthy credit score, it is essential to manage your credit utilization ratio. This ratio represents the percentage of your available credit that you are currently using. An ideal utilization ratio is below 30% of your total credit limit. To achieve a favorable ratio, use different credit instruments to balance your usage. Avoid exceeding 80% of your credit limit, as a high utilization ratio can hinder your ability to obtain new credit.
Avoid closing old credit cards or accounts, as this can negatively affect your payment history and relationship with your bank. Closing old accounts results in a loss of payment history, which can lower your credit score. Try to maintain your old accounts as long as you can continue to clear your dues on time, as this will help improve your credit score.
In conclusion, implementing these tips may not yield immediate improvements in your credit score, but developing good habits will lead to better credit health over time. If you have any questions, reach out to your bank for specific details about your credit score.
