As you know, a credit score is a statistical number that represents how you have used credit over a period of time. It is important to be consistent in your credit repayments to have a good credit score. A high credit score increases the probability of getting credit/loan easily as it indicates to lenders that the probability of you repaying a loan is higher. Good Credit Score becomes even more important because interest rate that you pay on any loan, can also depend on your credit score.
Smart ways to increase your Credit Score:
1. Clean up your credit report –You should apply for a credit report to check your score regularly. Many times there are errors in the report, which will lead to an inaccurate score. Removal of mistakes will improve the credit score.
2. Automate your payments – We have a busy life and we might miss paying credit card bills or mobile phone bills. You should therefore automate payments. Most banks have this facility now. There are many software tools and mobile apps available as well to keep track of payments or you can use good old calendar reminders.
3. Use credit cards- It is advised that credit cards should be used only for emergencies but from a credit score perspective; do use your credit card once in a while. This helps in many ways. The card remains active and repayment behaviour is reflected on your credit score. If the credit card gets cancelled due to inactivity, the good record of that card will also be lost. Read: 7 Costly Credit Card Mistakes Almost Everyone Makes
4. Use old cards first – You get tempted to get a new credit card looking at the offers and reward points. But before you get the new card and leave your old credit card unused, do remember that the proverb, ‘Old is gold’ holds true for credit cards. Older cards have a longer history and a history of good payments increases your credit score.
Many people also think they can improve their credit score by closing old unused credit cards, but this is not necessarily the case. Open sparingly used credit cards actually help improve your score as it shows that you have a high credit limit and low credit utilization. You need not use the card very often too. Using it once in a while will ensure that it stays on the credit report.
5. Old loans should be seen in the credit report – Do you remove the names of companies that you had worked with when you join a new company from your resume? You don’t as they offer an insight into your experience and expertise. Similarly, a longer history of good repayment practices will help increase your credit score. In case if you are planning to prepay some loan – go for newer one.
6. Behaviour indicating credit risk should be avoided – You should always be aware of your actions around credit. If you do something out of the ordinary like missing a credit card payment or reducing the monthly instalment on a loan or taking an advance on your credit card, it sets the alarm bells ringing and credit issuers can associate this with money troubles.
7. Get the Settlement Certificate – In some cases, even after you make a payment or you default on a loan but settle it after the due date, the lender does not update the records. You find your name is still present in the defaulters’ list of the Credit Bureau. You should send the ‘No Dues’ or ‘Settlement’ certificate to the lender. The bank would have issued this to you when you made the payment. The lender would then inform the Credit Bureau accordingly.
8. Be Fastidious – Do not agree to be the guarantor for anybody’s loan. If that person defaults on the loan, your credit score will be affected negatively. Conduct a due diligence on the borrower and guarantee loans selectively. Read: Top 10 credit score myths that need to die
Few basic Rules – from Cibil
- Rule 1: Always pay your bills on time.
- Rule 2: Keep your balances low.
- Rule 3: Maintain a healthy mix of credit. Your credit history should contain a mix of a home loan, auto loan and a couple of credit cards.
- Rule 4: Apply for new credit in moderation. (don’t show you are credit hungry)
If you would like to read more about reducing liability or strategies to get out of debt trap – you will find that in my book “Financial Life Planning – solve your biggest puzzle”.
It is important to have a high credit score so that you get credit easily when you most need it & at lower rates. Please share your experience & experiments with credit score – hope that will be helpful for TFL readers.Image courtesy of renjith krishnan / FreeDigitalPhotos.net