Why Your Credit Score Matters
Your credit score is a three-digit number that represents your creditworthiness to lenders. In India, credit scores typically range from 300 to 900, with a score above 750 considered excellent. A good credit score can help you secure loans and credit cards with favorable terms, including lower interest rates and higher credit limits.
On the other hand, a poor credit score can make it difficult to get approved for loans and credit cards, or result in higher interest rates and less favorable terms. It can also affect your ability to rent an apartment, get a mobile phone plan, or even secure certain jobs.
5 Effective Strategies to Boost Your Credit Score
Whether you're looking to improve a poor credit score or maintain an already good one, these five strategies can help you boost your creditworthiness and secure better financial opportunities.
1. Pay Your Bills on Time, Every Time
Payment history is the most significant factor affecting your credit score, accounting for about 35% of your CIBIL score. Late payments, defaults, and collections can severely damage your credit score and stay on your credit report for up to 7 years.
To ensure timely payments, consider setting up automatic payments or payment reminders. If you're struggling to make payments due to financial hardship, contact your lenders immediately to discuss hardship programs or alternative payment arrangements.
2. Keep Your Credit Utilization Low
Credit utilization refers to the percentage of your available credit that you're using. For example, if you have a credit card with a limit of ₹1,00,000 and a balance of ₹30,000, your credit utilization ratio is 30%.
Experts recommend keeping your credit utilization below 30% to maintain a good credit score. High credit utilization can signal to lenders that you're overextended financially and may have difficulty repaying new debts.
To reduce your credit utilization, you can pay down your existing debts, increase your credit limits (without increasing your spending), or spread your spending across multiple credit cards.
3. Maintain a Diverse Credit Mix
Having a mix of different types of credit accounts, such as credit cards, personal loans, and home loans, can positively impact your credit score. This shows lenders that you can manage different types of credit responsibly.
However, this doesn't mean you should open new credit accounts unnecessarily. Only apply for and open new accounts as needed, and make sure you can manage them responsibly.
4. Limit Hard Inquiries on Your Credit Report
Every time you apply for a new credit account, the lender performs a hard inquiry on your credit report. Too many hard inquiries in a short period can lower your credit score, as it suggests you may be in financial trouble or planning to take on a lot of debt.
To minimize the impact of hard inquiries, avoid applying for multiple credit accounts within a short period. Instead, space out your credit applications and only apply for credit when necessary.
When shopping for a specific type of loan, such as a home loan or car loan, try to do so within a short time frame (typically 14-45 days). Most credit scoring models will count multiple inquiries for the same type of loan within this period as a single inquiry.
5. Regularly Check Your Credit Report for Errors
Errors on your credit report can unfairly lower your credit score. These errors might include accounts that don't belong to you, incorrect payment statuses, or outdated information.
You're entitled to one free credit report from each of the four credit bureaus in India (CIBIL, Experian, Equifax, and CRIF High Mark) once a year. Review these reports carefully and dispute any errors you find with the respective credit bureau.
Additional Tips for Credit Score Improvement
Become an Authorized User
If you have a family member or spouse with a good credit history, ask them to add you as an authorized user on their credit card. This can help you build credit, especially if you have a limited credit history.
Keep Old Accounts Open
The length of your credit history accounts for about 15% of your credit score. Keeping old accounts open, even if you don't use them frequently, can help improve your credit score by increasing your average account age.
Use Credit Builder Loans
If you're struggling to get approved for traditional credit products, consider a credit builder loan. These loans are specifically designed to help people build or rebuild their credit history.
How Long Does It Take to Improve Your Credit Score?
Improving your credit score is not an overnight process. Depending on your current score and the factors affecting it, it can take anywhere from a few months to a few years to see significant improvement.
Negative information, such as late payments and defaults, can remain on your credit report for up to 7 years. However, their impact on your credit score diminishes over time, especially if you demonstrate responsible credit behavior going forward.
Conclusion
Improving your credit score requires patience, discipline, and a good understanding of how credit scoring works. By implementing these five strategies and maintaining good financial habits, you can gradually boost your credit score and unlock better financial opportunities.
Remember, a good credit score is not just about getting approved for loans and credit cards; it's about securing better terms and saving money on interest and fees over time. Start implementing these strategies today, and you'll be on your way to a healthier credit profile and a more secure financial future.
At DhanRishi, we believe in empowering our customers with the knowledge and tools they need to make informed financial decisions. If you have questions about your credit score or need guidance on improving it, our financial experts are here to help.