Do you guys get frustrated when you apply for a loan or credit card, and it gets rejected, especially for bad credit score? At that time, do you guys think about how to improve your credit score? Does credit score matter so much that a bank can reject your loan/credit card application based on a credit score? Let’s check this out below:
Table of contents
What is a Credit Score?
A credit score is a consolidated number representing your performance about managing your credit like repayment of loans, credit card dues, etc. A higher number denotes a less risky profile, and a lower number means a more risky profile. Any person who has never availed any loan/credit card from any institution will not have any credit score. Such a profile would be termed as new to credit.
But Why Credit Score?
Bank and financial institutions have many factors in deciding to give the loan to a person. A improved credit score is one of the factors which determine the repayment capacity and intent of the borrower. Imagine a borrower approaching the Bank for a loan with all his proofs/ID as fake. It will be difficult for Bank to know the repayment intent of the borrower.
Types of Credit Score Check
- Soft check: Usually done when the borrower wants to check the eligibility for loan/credit.
- Hard check: Done when the borrower applies for a loan/credit.
What are the factors that determine the credit score?
Various factors that determine credit score are Credit History, Amount Outstanding, Payment History and Credit Availability.
- Credit history: If a borrower has a long credit history, there is a possibility of higher credit score.
- Amounts outstanding: People having high outstanding or max outstanding in their credit card are likely to score less in credit score.
- Payment History: If one regularly pays his debit/credit card dues within due dates, it will have a positive impact on credit score.
- Credit availability: Taking credit within short intervals is likely to impact negatively on your credit profile.
What is the ideal score to have a loan/Credit card?
I think there is no ideal score for having a loan as each institution funds the person/entity basis his risk appetite.
To explain in numbers, anything below 300 is not funded by anybody.
A credit score ranging from 600 – 700 is good enough to borrow. In this score, most of the institutions should be able to lend you the loan. A credit score of 750 is considered excellent by most of the banks.
Now ways of How to Improve your Credit Score
Pay your EMIs/Dues on time
The first and foremost thing you need to continue doing is regularly pay your EMI’s/Dues within due dates. Also, make sure that your payment is not bounced/unfulfilled. That is the most critical criterion which credit rating agencies observe while assigning a score to the profile.
Clear your old debt
In case you have availed any debt earlier, which you have cleared partially/fully, and this amount is classified by the institution as bad debts, then settle off this one immediately. After settlement, Bank will reclassify this debt as useful and will report to the credit agency, who will improve your credit profile.
Maintain low credit ratio
In case you have a credit card, and the right amount of limit is provided in it, that doesn’t mean you have to utilize this credit fully. In short, you should use credit up to limit which you can repay it without any hassle. A 25 to 30% of your credit card utilization would be great to maintain and improve your credit score
Avail short term loans
Borrowing for short term and repaying it on a timely basis may improve your credit score, especially from 600 levels to 700. It is one of the fastest methods to improve your credit score. Nevertheless, not many people can avail of such short term unsecured loans.
Joint holder/party loan
There are instances where you could be a joint party/guarantor to a loan. The other party with whom you have jointly taken a loan could be a defaulting party, and hence such an arrangement could have an impact on your credit score too. In short, avoid any joint investment with people who are defaulters to negate any adverse effects on your credit score
Agencies Who Allot Credit Score
The agencies who calculate and allot the credit score to the profile are called Credit Information Company (CIC) in India. There are 4 CIC who provide credit score to the profile
TransUnion CIBIL
Established in 2000, it has a member base of more than 950 entities, including banks, NBFC’s and other entities.
Experian
It is one of the CIC which is jointly operated by numerous entities like GUS Holdings Netherlands, Union Bank of India, Axis Bank Limited, Sundaram Finance, Magna Fincorp Ltd, Punjab National Bank, Federal Bank limited, and VIC enterprises private limited. Established in 2006, it received the license of CIC in 2010 under CICRA Act, 2005.
Equifax
Founded in the US, it was registered in India in 2010 as CIC. It is one of the largest credit agencies in the USA.
Highmark
One of the popular CIC, it has headquarter in Mumbai and founded in 2005. It helps the entities to analyze the risk profile of the borrower before approving the loans.
So that’s from the topic “How to Improve your Credit Score?”
I hope these techniques help you to improve your credit score and build an excellent credit profile.
Let me know if any of your techniques helped you in comments or like my article.
FAQs
How to Improve Credit Score effectively?
To effectively improve your credit score, you should consistently pay your bills on time, reduce your credit utilization ratio, monitor your credit report for errors, maintain a mix of credit types, and avoid opening too many new accounts simultaneously.
What are the key factors that can help Improve Credit Score?
Key factors that can help improve your credit score include payment history, credit utilization, length of credit history, credit mix, and new credit inquiries.
How can I improve my credit score quickly?
To quickly improve your credit score, focus on paying off outstanding debts, making all future payments on time, reducing high credit card balances, and disputing any inaccuracies on your credit report.
Is it possible to Improve Credit Score without taking on new debt?
Yes, it is possible to improve your credit score without taking on new debt by making timely payments, lowering existing debt balances, and regularly checking your credit report for errors that need correction.
How long does it take to Improve Credit Score?
The time it takes to improve your credit score varies by individual circumstances, but noticeable changes can typically be seen within a few months with consistent positive credit behavior.
Can using a credit card help Improve Credit Score?
Yes, using a credit card responsibly can help improve your credit score if you pay your balance in full each month and keep your credit utilization low, demonstrating good credit management.
How to Improve Credit Score after bankruptcy?
To improve your credit score after bankruptcy, focus on establishing a positive payment history with secured credit cards or loans, keep your credit utilization low, and regularly monitor your credit report for inaccuracies.
Author profile: Jai Nagpal is a Chartered accountant by profession and works in a multinational company. Writing is his passion. He is also the author of the book Love.. matter of Heart or Mind” available in amazon. You can also get in touch with him in his blog website www.indiansuchak.com.
