A Simple Guide to Improve Credit Score

A credit score represents the creditworthiness of an individual which plays a crucial role in his financial life. Higher credit score can lead to lower interest rates and favourable terms. Whereas a lower credit score can lead to higher interest rates and limited financial opportunities. The credit score is important when applying for loan, credit card or mortgage.

Meaning of Credit Score:

In India, CIBIL which is an abbreviation for Credit Information Bureau (India) Limited is one of the leading financial information companies. Its main role is to collect and maintain credit related financial information of individuals and businesses.

The CIBIL score is of three digit number ranging from 300 to 900. This score is based on the credit history of an individual. Higher score is an indication of better creditworthiness and lower score is an indication of higher credit risk associated with lending.

Factors influencing CIBIL Credit Score:

Payment History (35%)	Timely payments of loans, credit cards bills and EMI’s. Late payments or non-payments would lead to negative impact on credit score
Credit Utilization (30%)	Credit utilization is the ratio of credit card balance to credit limit. A lower credit utilization is favourable for higher credit score.
Credit History Length (15%)	Long credit history is always favourable.
Types of Credit (10%)	The balance between different types of credit such as credit cards, loans and mortgage is important for responsible credit management.
New Credit (10%)	Obtaining many new credits can have a negative effect on credit score, as it shows financial instability or desperationS.

Breakdown of credit score ranges:

• 300-500: Poor
• 500-650: Fair
• 650-750: Good
• 750-900: Excellent

The CIBIL credit score can easily be checked by visiting the official website. Another alternative is to contact credit score agencies such as Equifax, Experian, and CRIF High Mark.

Importance of a Good Credit Score:

A good credit score shows creditworthiness to the lender, reducing their risk in comparison to ones with bad credit score. Below are few benefits of good credit:

• Lower Interest Rates- Individual with good credit score can get loan or mortgage at lower rate. Resulting in low EMIs and significant saving over the life of the loan.
• Speedy Approval Process- Individuals having good credit score are considered less risky to the lenders. In case of urgency in getting the funds, good credit score comes handy in securing loan speedy.
• Better Insurance Premiums- The credit score is also viewed by insurance companies to determine the insurance premium. The premium of good credit holder will be less for auto insurance or homeowner’s insurance.
• Negotiating Power- A strong credit provides for negotiating powers in a financial transaction. Having a good score makes a person reliable and responsible borrower making him ideal for lenders. Thus he can negotiate the interest rates and terms of loan with the lender
• Access Premium Financial Products- Some credit cards facilities, premium banking services and preferential terms on credit line are reserved for individuals having high credit score.

Few Ways of Improving Credit score:

• Timely Payment:

It is of most important to repay debts on time. A slight delay in paying EMIs can result in the lender charging late fee and which will affect credit score adversely. If debt is repaid on time than it shows that the individual is responsible and can be trusted in future.

• Credit Utilization:

The credit score can be increased by limiting the credit usage on the bases of allotted limit in credit card. This is achievable by simply contacting the lender and arranging credit limit based on the individual expense.

• Settlement of Outstanding debts:

Repayment of outstanding debt is another way to improve credit score. Tackle existing debt when they are marked charge offs or are in collections, by negotiating with the creditors for the repayment of less than the due amount or preparing a repayment plan.

• Professional Guidance:

Seeking professional guidance is a must when the credit situation is complex. A professional agency can suggest various strategies to improve the credit situation.

• Prepare Budget:

A budget should be prepared where income and expenses are clearly stated. The expenses which are unnecessary should be recognized and cut off, the saved amount should be utilized for repayment of debt.

• Longer Repayment time:

While taking a new loan make sure that its repayment time is longer. When repayment time is long EMIs is low and can be paid easily. Therefore, ensuring that no default will be made in repayment of loan directly affects credit score in a positive way.

• Avoid taking excessive debt:

New debt should only be taken when it is absolute necessary. As taking too much debt in a shorter time will not only be harmful to your credit score but also be hard to repay. It is advisable to first repay a loan and then take another loan, so that the repayment does not become a burden on individual.

• Review credit report:

Sometimes it so happens that in CIBIL report is inaccurate due to mistake or delay in updating records. Due to these mistakes the credit score goes down. These errors or mistake should be identified and the dispute should be raised online.

• Maintain old accounts:

Closing an old credit account can have negative impact on credit score. Even when the old credit account is unused it should not be closed due to its credit history.

• Be Patient:

Improving credit score is a continuous process which requires patience. One should avoid schemes which promise quick fix of credit scores as they are often scam that have negative impact. Therefore patience is the key in enhancing the credit score.

Improving the credit score will require discipline and persistence, but it will be worthwhile as it will lead to better financial opportunities and peace of mind. The simple responsible habits like repayment on time, credit utilization and reviewing credit report regularly, will definitely increased creditworthiness. This journey may seem difficult at first but always remember that the long-term benefits of the efforts will be valuable.