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Your credit score plays an important role in your financial life today, and it means more than just a simple number. A higher credit score may make all the difference when it comes to making major purchases in life, from getting approved for that dream home to obtaining lower bank loan rates.
However, how to increase credit score to get these advantages, and what does it tell lenders about you specifically?
In this blog post, we'll examine how to raise your credit score practically and discuss why getting a higher score needs to be one of your main financial objectives.
What is a Credit Score?
Let’s first understand what a credit score is before discussing how to increase credit score. It is a three-digit number, which ranges from 300 to 900, indicates your creditworthiness, or your probability of repaying a loan.
Your credit score is used by banks and other financial institutions, and credit card companies, to assess your risk level before sanctioning a loan. Giving you a loan seems safer when your score is higher, which might make borrowing money simpler and less expensive (low interest rate).
A good credit score is higher than 750, while a reasonable score falls between 700 and 749. Banks can have trouble granting you a loan if your credit score is below 700, or they might authorize a loan with a little higher interest rate. Furthermore, you cannot be granted a loan if your score is below 600, which is considered bad.
What does your Credit Report include?
A few popular companies who calculate your credit score are CIBIL, CRIF etc.
Your Credit Score Report or CIBIL Report includes the following details,
- All loans you have availed from banks/ financial institutions
- Type of loan (Business, auto, personal, agricultural, credit card, housing loan, etc.)
- Date on which you availed the loan
- Amount of loan
- Period of loan
- EMI of loan
- Outstanding balance of all loans
- Repayment history (generally for the last three years)
- Current overdue position, if any
- Whether you have defaulted in past, if any
- Status of loan (Active, closed, Settled, Written-off)
- Past loan enquiries you have made
- Whether you have offered a guarantee to any other loan and their repayment history
Why is a Good Credit Score Important?
A good credit score can have real-world consequences on your finances. How to Increase Your Credit Score naturally involves understanding its impact:
- Credit Approval: As the Banks rely on your credit score to assess the risk of lending to you, a higher score increases the chance of being approved for all types of credits such as loans, credit cards.
- Lower Interest Rates: With a high credit score, banks see you as a less risky and creditworthy borrower. Hence, you can get loans with lower interest rates and credit cards, which can save you money over time.
- Access to Larger Loans and Credit Limits: A good credit score opens the door to larger loans and higher credit card limits, which can provide more flexibility in managing your finances.
- Negotiation Power: If you have higher credit score, a lot of banks will be ready to offer you loan, you will have lucrative offers. Hence, you can negotiate with your existing banks on interest rate, processing fees or other charges.
How to Increase Credit Score?
Now that you understand why a good credit score is necessary, let’s explore how you can improve yours. Increasing your credit score takes time and discipline, but the payoff is well worth the effort.
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Pay Your Bills and EMI on Time (Regular Repayment of Loans):
One of the most important factors affecting your credit score is your payment history, which makes up about 35% of your score. Late repayments, even by a few days, can hurt your score. Hence, automate your payments to ensure you never miss a due date. The longer you maintain a history of on-time payments, the more positive the impact will be on your credit score.
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Reduce Your Credit Usage Ratio:
Your credit usage ratio is another important consideration. It is just a ratio of how much credit you are using to the total amount of credit you have been approved for. For example, if you have a credit card limit or overdraft limit of Rs. 100.00 Lakhs, don’t utilize it fully every time. Keep the utilization level up to, let’s say, Rs. 80 Lakhs. The lower your utilization rate, the better your score will likely be.
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Avoid availing loans frequently:
A "hard inquiry" is added to your credit report each time you apply for new credit. A single query won't have a big impact, but several queries in a short amount of time can lower your score. Try to only apply for additional credit when it's required.
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Consider a Secured Credit Card
If you're new to this credit score system or trying to improve your credit score, then applying for a small secured credit card is a smart choice. These cards work similarly to normal credit cards, except they require a deposit as security. A credit card against a fixed deposit is an example. You may start rebuilding your credit score by utilizing them sensibly and paying your bills on time.
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Track repayments even if you are a guarantor or co-owner of other loans.
Did you know that if you are a co-borrower or guarantor on a loan, you share equal liability for late payments? Therefore, regularly monitor your joint, co-signed, and guaranteed accounts.
It may also affect your ability to get credit in the future if your co-borrower or borrower defaults on payments.
You may thus ensure that your credit score increases in this manner. Additionally, refrain from providing guarantees for too many loans.
How long does it take to improve your Credit Score?
If your credit score is below the benchmark and you want to improve it, it will improve. But the time for it depends on what factors are affecting it specifically, as well as the actions you take to improve it.
If your credit score is low due to just one missed payment, you may quickly restore your credit score. However, if you fail to make payments on many accounts for several months, then the recovery process can take longer (maybe 6 months or more). This negative impact will increase further if your overdue payments result in foreclosure.
Conclusion
How to Increase Credit Score is a gradual process. Financial discipline, good financial habits, and patience are the key to having a good credit score.
FAQ’s
What is the fastest way to raise your credit?
The fastest way to raise your credit is to pay down credit card balances and make all payments on time.
How to improve your CIBIL score quickly?
Pay your dues on time, reduce credit card usage, and avoid multiple loan applications to quickly improve your CIBIL score.
Can my credit score increase in a month?
Yes, your credit score can increase in a month if you make timely payments, reduce debt, or correct errors on your credit report.
How to jump credit score 100 points?
To improve your credit score by 100 points, pay off debts, make on-time payments, and lower your credit usage.
