A credit score is an overview of a person’s financial health. It is an essential factor for banks and financial institutions when applying for a credit card or a loan. A good credit score makes it cheaper for the borrowers to borrow money and is eligible for every kind of credit they may require at lower interest rates. A credit score keeps a track record of an individual’s credit history of borrowing money and paying it back.
A good credit score can be beneficial in a lot of ways. For example, it might help you get an easier loan for your next big purchase or make sure that the interest rates are not too high when applying to different banks and companies for loans altogether. To improve your credit score, there are some things you need to do, like paying back any outstanding debt on time as well as consistent payment history, which will eventually raise how favorable lenders see them! So if this sounds interesting, then read more about these tips here;
What is Credit Score?
A credit score is a three-digit value provided based on the credit history of a borrower. The credit score summarizes the creditworthiness of an individual. Credit reporting agencies, such as CIBIL, Equifax, Experian, and CIRF Highmark, provide these credit scores. Individuals get graded on a scale of 300 to 900, with 300 depicting the lowest score and 900 being the highest. The higher the credit score, the better will be chance of obtaining loans and credit cards.
How is Credit Score Calculated?
The credit scoring model is a complex algorithm that can be used to evaluate the individual’s credit report and generate an accurate score based on their past actions. This formula is used by the major reporting agencies to determine how responsibly an individual manages their finances and if they deserve more or less privileges when it comes to borrowing money from financial institutions.
- Payment history of an individual
- Credit Utilisation Ratio
- No credit accounts held by an individual
- Credit Mix
- Hard Inquiries
- Length of Credit History
How to Improve your Credit Score?
By Paying Outstanding Bills
A person can maintain a good score by making payments on their outstanding credit card bills on time. The repayment history of a borrower plays a vital role while calculating the credit score. Late payments affect the credit report of an individual and result in a low credit score. Late payments make the borrower liable to pay additional charges in the form of a penalty on their loan amount. Timely repayment of the credit balance in monthly installments helps an individual to maintain a good credit score.
Examine your Credit Reports
By examining and reviewing the credit report every once in a while, an individual can improve his credit score. A person can assess these reports from any credit reporting agencies, viz CIBIL, CIRF Highmark, Experian, Equifax, to analyze and evaluate the factors affecting their credit report and make necessary amends for it. Based on the credit report, a credit score gets provided to an individual. Hence it becomes critical to review and rectify any errors or mistakes in the credit report.
Credit utilization is a way of measuring the individual’s credit and how much they use. If an individual has low dependence on their credit, then it would be safe to say that they have a high reliance on other sources like savings or investments when buying things for themselves; as opposed to someone who needs more money than what they can afford with cash where this might seem risky but also necessary. For example, a credit card issued is with a credit limit of Rs 1 lakh and the amount spend by the individual using a credit card is Rs 40 thousand. The credit utilization in this scenario will be 40%. Credit utilization of 30% is considered optimum for a borrower. The borrower can also maintain a good credit utilization ratio by increasing their credit limit and keeping the credit usage low.
Minimizing Hard Credit Inquiries
Why do hard credit inquires get done? They are meant to help banks and financial institutions evaluate borrowers before granting them loans. However, these inquiries can affect a person’s score because they hurt the amount of available borrowing power. A high number of hard credit inquires in a short period harms the credit score of the borrower.
By creating a healthy mix of credit between secured and unsecured, loans a borrower can improve his credit score. Diversifying and maintaining credit between various forms helps in building a good credit profile. It makes it cheaper for the borrower to obtain loans.
By Maintaining Old Accounts
By maintaining an old credit account, an individual can create a long credit history. People often deactivate their old accounts after repaying their debts. Old credit accounts represent the credit history of individuals used to improve their credit score. Closing a credit card account will also affect the credit utilization of individuals by lowering the available credit.
An individual can also increase their credit score by consolidating their debts. Banks and credit unions provide a debt consolidation facility whereby the borrowers can consolidate all their outstanding loan amounts.
A good credit score can be beneficial in a lot of ways. For example, it might help you get an easier loan for your next big purchase or make sure that the interest rates are not too high when applying to different banks and companies for loans altogether. To improve your credit score, there are some things you need to do, like paying back any outstanding debt on time as well as consistent payment history, which will eventually raise how favorable lenders see them.