Finance

How to improve your credit score – Dos and Don’ts

What is Credit Score?This is a statistic number that is calculated from your credit history, repayment patterns, and other financial data that rating agencies have collected from financial institutions. Your Credit Score is a measure of your creditworthiness. This data is collected and stored by rating agencies based upon a key or unique ID, such as Permanent Account number (PAN – issued from the Income Tax Department of India) or SSN for USA. Different parameters may be used to determine the weight. Each agency will assign a different weight-age. It generally ranges from 300 to 850 points.

Lenders can get a credit score report to determine the likelihood of default from borrowers if they are given a loan/credit facility. Higher Credit Scores are more likely to be approved for loans at lower interest rates. It is therefore important to verify your credit score before you apply for any new loan or credit. Credit scores below 600 are considered poor, and financial institutions will not lend to these individuals. It is possible to improve your credit score easily by practicing financial discipline. Creditworthiness can be seriously damaged by ignorance or small mistakes. You can improve your credit score and get lower credit rates by paying less attention to the little things.

You can improve your credit score by following these dos and don’ts.

Dos

1. Don’t delay in paying your installments for existing loans.

2. Credit card bills should be paid on time. Pay your credit card bills promptly using the ECS or Auto Debit facility. This will ensure that you don’t forget to pay the bill on the due date.

3. Prepay existing loans if possible. A little extra over the due EMI/instalments not only reduces the interest but also improves your credit score.

4. Good, long-standing banking relationships with current bankers will increase your credit score. Changes in your banker, especially for business credit, can lower your credit score.

5. Make sure you pay all your utility bills, including mobile, electricity, and municipal taxes on time. These are not reported for credit score checks, but they can help you keep your finances in order.

Don’ts

1. Don’t take loans from multiple banks. Maximum credit facilities should only be used by one or two banks. If you have two personal loans from one bank, two home loans, two auto loans and two housing loans, then this is a good example. This arrangement will lower your credit score. You can transfer all five of these loans to one or maximum two banks.

2. You should not transfer your credit card balance from one account to another. You won’t be able to pay your credit card bills if you rotate the balance. This will seriously affect your credit rating.

3. Limit your credit card use. Ask the credit card company to increase your credit limit if you are using more than 90% of your credit limit.

4. Don’t cancel any of your credit cards because you have taken out a new card. Credit scores will improve if you have a longer credit history and make regular payments on your bills.

5. Avoid taking too many credit cards from various banks. Limit to 3-4 cards per bank. If you use these cards often and make timely payments on your card bills, your card company may be happy to increase the limit.

6. Unless it is an urgent situation, don’t withdraw cash from CREDIT Cards via ATMs. If you are unable to withdraw cash from your ATM card, frequent cash withdrawals can cause credit damage. Instead, consider using Debit Cards linked with your savings account to make cash withdrawals.

To see your credit score sheet, make sure you do it once per year. If you notice any errors in your credit score sheet, please immediately notify the financial institution concerned for corrections and updating the rating agencies. This is especially important if you plan to apply for a new loan or credit facility.

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