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Credit Score is calculated using your credit history, which contains information such as your payments history, number of loans or credit card used by you, etc. In India, there are 4 major Credit Information Companies, namely CIBIL, Experian, Equifax and Highmark.
A high credit score increases your chances of getting a loan or credit card and a low score completely ruins it. Banks do not like to give loans or credit cards to people with a low score because they do not trust them with their money. Despite having a low score, if you get a card or loan, then your credit limit may be low or you might have to pay a very high rate of interest. To prevent this, you must improve your credit score.
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There are different ways using which you can repair your credit score. Some of them are as follows:
One of the important things that you must do to improve your credit score is check your credit report. Doing this will help you in identifying errors in your report. If you find mistakes in your report, you must get it rectified immediately. As the credit score is calculated based on the information mentioned in the credit report, it is very important for you to ensure that this report is free of errors.
If you have any outstanding credit card bills or loan, you must pay it off immediately to repair or improve your score a bit. Payment history is one of the factors that is taken into consideration while calculating the credit score. If you have a history of delayed payments, then your score will be low and vice-versa. It is a good idea to activate payment alerts or auto debit facility to ensure that you always pay your credit bills or EMIs on time. Also, avoid paying only the minimum amount due on your credit card always as it will increase the outstanding balance of your card. Try to pay the full bill to keep the outstanding amount low.
It is another major factor that is considered while calculating the credit score. The amount of credit that is available to you versus how much of it you are using shows your dependency on credit money. It is advisable that people keep their credit utilization below 30%. So, if you have multiple credit cards, keep a check on how much money you are using on credit. Also, try to find a credit card issuer who will accept multiple payments in a month.
Some people tend to remove old accounts or deactivated accounts or accounts with negative history from their credit report to make it look good. Some even try to get their old debts removed from their reports once they pay them. This may not be a very smart thing to do. Agreed that negative things are bad for the score, but they are automatically removed from the credit report after a period of time. Getting old accounts removed may harm your score a lot as they may have a good repayment history. Also, if you have paid your debts, then you should keep them in your report as they will improve your score and also show your creditworthiness.
Many people whose scores fall drastically are ones who do not plan their finances well. If you apply for too many credit cards just to increase your credit limit, but are unable to pay the bills off on time of all of them, then you will be left with a huge outstanding balance and history of delayed payments that will decrease your score by a lot. Also, applying for unplanned loans can leave you in a very bad financial state, if you are not able to repay them. Thus, it is important to plan credit and apply for a credit card/loan only if it is absolutely required and when you are sure that you will be able to repay the amount you borrow.
Credit score cannot be repaired in a day or two. It requires time, patience and planning. Once your credit score improves, try to not make any mistakes that will harm it. If you do not have a credit score at all, then try to build it by applying for a regular or secured credit card.
There are two kinds of inquiries that can be performed- a hard and a soft inquiry. A soft inquiry is when you check your own credit. When potential employer looks through your credit, or if any checks are carried out by financial institutions (which you already do business with), these are called soft inquiries. Soft inquiries do not affect your credit score.
A hard inquiry is what happens when you apply for a credit card, or a loan. Hard inquiries that take place once in a while will not affect your credit score.However, many of these within a short time span will affect your credit score. Banks will take this to mean that you require money because you have a facing financial problem.
If you have too many debts that are, you could actually use this to your advantage. You can take out a debt consolidation loan from your bank or a credit union. You can them simply pay them off. You will only have to make one payment. Keep in mind that if you can a lower interest rate on your loan, you can pay down the debt faster.
Another way to consolidate many credit card balances is balance transfer. Some cards often have a promotional period during which they charge 0% interest on the balance on your card. However, the balance transfer fee can cost you between 3% to 5% of your amount.
Once indebted, you are under close watch by financial institutions. No transaction made by you in the credit market will go unnoticed, and the same is recorded and maintained in your Credit Score. The scores may range anywhere from 300 – 900, 300 meaning you have an appalling score and 900 meaning that you’re every lender’s dream customer.
Although simple to comprehend, there are a lot of myths revolving around it. Here are 10 facts regarding Credit Scores.
Do you think a good Credit Score is essential only for obtaining a banking product? Not surprisingly, it is equally important for less perceptible requirements such as getting an employment offer and even renting a vehicle. Many people are aware of the concept of credit rating system. A credit score is basically a three-digit number that assesses how likely you shall be to repay a mortgage. It utilises data from credit reports to comprehend the risk of bad debts. A credit report is a detailed description of your credit history. There are few more companies in Indian which do the same task- CIBIL TransUnion, Equifax, Experian and High Mark.
An excellent credit score enhances your chances of being pondered for a mortgage, especially for a home loan. You are more likely to get lower interest rates on mortgages and may negotiate a lower insurance rate. The current home mortgages can be refinanced to a lower interest rate. Bankers may offer a lower processing fee and a flexible repayment option.
One of the most useful features of a credit card is the convenience of paying as well as getting the security. Thanks to these two factors, we have been witnessing a massive growth of credit cards.However, even though credit cards come with the convenience of buy now pay later, you have to make sure to be particular the repayments. A bad repayment history takes a toll on your credit score in a big way. Let’s understand how is your credit score calculated:
• 35% - Payment History
• 30% - Credit Utilisation
• 15% - Age of Credit History
• 10% - Type of Credit
• 10% - Credit Inquiries
All the aforementioned factors affect your credit score but the payment history and credit utilisation hamper your credit score the most. Let us now understand how credit cards impact these two factors.
The chances of missing out on credit card payment are usually high and therefore you should be extra careful and remember the due dates. If you are not able to keep up with the payment due dates, it is better to come up with a simple foolproof way to avoid delay. You can either give standing instructions to your bank to pay off the bill from your savings account on a particular date. If you miss the due date or pay only the minimum due, your balance will accumulate interest. Any subsequent purchases on your credit card will also accumulate interest from the date of purchase. You also lose out on your interest-free period. Late payment of non-payment of bills hampers your credit score and brings it down.
You should first learn how credit utilisation is calculated. Majority people are not aware that the higher your credit utilisation ratio, the larger effect it has on your credit score. As per experts, you should use only 20-30% of your credit limit. If you constantly spend a high percentage of your credit limit, say 60-80%, your credit utilisation ratio takes a hit. It’s important for you to keep the ratio low as it enhances your credit score. One way to tackle high credit utilisation ratios is to use multiple cards. As you already know that the 30% of your credit score comprises your credit utilisation ratio, you should be extra careful while using your credit card and always keep an eye on the credit limit.
It must be noted that improving your credit score take time and patience and it cannot happen overnight. You have to follow certain discipline and work towards your financial goals to achieve the desired credit score.
Although not many people can access your credit report, a few individuals and institutions who legitimately requires it may have access to it. If a company has a genuine business requirement with you, it is safe to assume that they have access to your credit report and score. Here’s a list of some of the institutions and individuals that have access to your credit report.
Banks – Quite naturally, banks can gain access to your Credit Report to gauge your credit worthiness. You don’t necessarily have to have a credit card for banks to have access to it. Your credit worthiness may be examined if you’re applying for a loan or even opting for an overdraft facility as this is considered to be a line of credit as well.
Creditors – Anyone willing to loan you money will have to determine your credit worthiness before they put their faith in you. Credit card issuers and mortgage lenders are amongst a few that fall in this category. Determining your credit worthiness helps the creditor gauge if you’re capable of repaying the loan and helps the creditor determine the terms and conditions of the same. Generally, the better your credit score, the more likely you are to get a loan approved and attain favourable terms when it comes to repayment and interest rates.
Insurance Companies – Statistically, it shows that individuals with poor Credit Score are more likely to file a claim. Insurance companies often measure your credit worthiness to determine how much they need to charge you for a new policy.
Employers – Several employers now use credit reports to judge an employer’s honesty and integrity when it comes to finance. It can also be used to assess the risk of bribery pertaining to an employee as people with a lot of debt are more susceptible to bribery. In some cases, the reports can be a decisive factor when it comes to promotions and demotions.
Government Agencies – Government agencies who have a legitimate requirement to pull up your credit score may do so. In the event that you’re applying for government benefits, court order, conducting business with the government, or any such instance, the government may pull out a report to understand your financial standing.
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