Here's How To Manage Your Credit Score

The score is generated based on an individual's credit repayment behavior over a period of time

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Your credit score holds a lot of power when it comes to accomplishing life’s big milestones, such as buying a new car or taking out a mortgage on your first home. Lenders rely a lot on your credit score when deciding whether to approve you for a new financial product. After all, it works as a key factor for banks and financial institutions while providing you with a loan or a credit card.

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A credit score is a three-digit numeric number ranging from 300 to 900, and it is assigned to every individual who has availed of a credit product, based on his or her credit/loan behavior over the period. In India, credit history is maintained by credit bureaus that are licensed by RBI. Currently, there are 4 credit bureaus in India, and they are TU CIBIL, Experian, Equifax, and CRIF Highmark. Each of these credit bureaus has its own algorithm to assign a credit score to every individual.

The score is generated based on an individual’s credit repayment behavior over a period of time. All of us need to maintain a healthy credit score as it determines our borrowing capability. Keep in mind that it's not just prospective lenders that use credit scores but even existing lenders also keep looking at your repayment and borrowing behavior and determine whether to continue with credit facility or upgrade or downgrade the credit facility or product. Increasingly, insurance companies are using credit scores as one predictor, not only of on-time payments, but also of an individual's overall financial behavior that increases their level of risk. Other financial institutions and employers are also checking credit scores to screen out undesirable applicants.

Easy tips to improve your credit score

Paying loan EMIs/credit card bills on time: Your payment history—whether or not you pay your bills on time—has the biggest impact on your credit score. It’s also something that lenders pay close attention to when they pull your credit report before approving you for a loan or new credit card.

Never pay just the minimum amount due on credit card bills: In general, you should make payment of your credit card bills either in full or at least pay more than the minimum due amount. Paying the minimum due amount on credit card bills reduces your chance to improve your credit score.

Avoid unnecessary inquiries for loan/credit card: Multiple credit inquiries within short span of time from potential lenders, solicited or unsolicited, can actually lower your score. This includes inquiry from mortgage companies every time you get a pre-approval on home loan and inquiry for a credit card at department stores that offer you a 10 per cent discount or applying for unsolicited credit card offers you receive in the mail. One should avoid making an application for loan/credit card until necessary.

Maintain credit card limit utilization below 60-70 per cent: Avoid utilizing your credit card limit to its fullest, as it impacts credit score negatively. If you happen to utilize the limit completely, you should make sure that the payment is done in full/part to bring the limit utilization down to 60-70 per cent.

Good mix of credit product: Always maintain a good mix of both secured (home loan/auto loan/two-wheeler loan, etc.) and unsecured (personal loan/credit card/consumer durable, etc.) loans. A good mix improves the chances of having a better credit score. Although, having too many unsecured loans should not be preferred.

Review your credit report regularly: One should check his/her credit report for any wrong reporting done by any lender in the credit report. If in case, there is any discrepancy in the loan/credit tradelines then you can raise dispute to credit bureau or the lender directly and get the issue(s) resolved. This practice helps in the improvement of your bureau score. It is always recommended to check your credit score well in advance as there is no way you can correct the report at the last minute.

Also monitor loans where you are co-borrower or guarantor: In case you are co-applicant or guarantor for any loan where you are not a primary borrower, you should monitor repayment behavior of these loans as well as they may also impact your credit score.

Good credit management leads to higher credit scores, which in turn lowers your cost to borrow. Living within your means, using debt wisely and paying all bills—including credit card minimum payments—on time, every time are smart financial moves. They help improve your credit score, reduce the amount you pay for the money you borrow and put more money in your pocket to save and invest.