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How To Improve Credit Score?

IndianMoney.com Research Team | Updated On Saturday, January 05,2019, 10:09 AM

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How To Improve Credit Score?

 

 

Credit score is very important to get loans sanctioned. If you want to get that home loan, make sure you have a good credit score. A credit score is a 3-digit summary of credit worthiness. A good credit score improves chances of getting loans sanctioned.

Payment history is one of the most important factors of credit score. If you don’t make repayments in time or default on loans, you get bad credit score. Payment history constitutes 35% weightage in credit score.

Credit utilization helps banks access creditworthiness. Handling credit responsibly, brings a good credit score. Credit utilization is the percentage of available credit you have borrowed. If you use most of the available credit limit, credit score goes down. High credit utilization on credit cards brings bad credit score. Credit utilization constitutes 30% weightage in credit score.

Length of credit history is very important for credit score. It constitutes 15% weightage in credit score. Banks and lenders like long-term credit history because it gives them the big picture on financial behavior of customers.

New credit constitutes 10% weightage in credit score. Be very careful when availing new loans. Applying for multiple loans from different banks at the same time, gives banks the impression you are credit hungry. This affects credit score.

Credit mix (This is the percentage of unsecured and secured loans availed) is important for credit score. It constitutes 10% weightage in credit score. If you have availed unsecured loans like personal loan, credit cards and so on, you end up paying high interest and this affects the credit score.

It’s time for the office. You grab your bag and rush to catch the bus. This routine has gone on for several years. Ever wondered why you work so hard? Oh…it’s simple. You want to buy your dream home. You have even applied at the bank for a home loan. Unfortunately, your dreams have been shattered. The bank has rejected your home loan application…You’re shocked…Something about a bad credit score.

Want to know more on Home Loans? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

SEE ALSO: Tax Benefit For Home Loan

How To Improve Credit Score?

Take a look at your credit report

Your bank sends a report on how regular you are in your EMI payments on your loan, to Cibil. Cibil creates a credit information report on your repayment history (credit history), so that banks get an idea, if you are a good candidate to lend to. This report is made available to all banks.

You need to check your credit report periodically, if you want to ensure a good credit score. You might have repaid your loan, but your bank has failed to update this. Your credit report states that this loan is currently active. Your credit score goes bad. There is also a chance of clerical error or an updating mistake. Banks could have made a mistake while sending your repayment information, or cibil could have made an error, while updating your credit report. In either case you suffer. It is in your best interest to check your credit information report.

Steps to improve credit score:

1. Check credit score regularly:

The CIBIL score is a 3-digit score between 300 to 900. It helps banks decide on sanctioning loans. CIBIL scores of 750 and above are good. Experian gives credit score between 330 to 830. A credit score of 750 and above is good.

IndianMoney has a tie-up with Experian to offer free credit score. Check credit report regularly to rectify mistakes. Close home loan accounts after repayment is completed for good credit score.

Checking Experian credit score and credit report does not impact credit score.

2. Make repayments on time:

All repayments made are recorded in the credit information report. Pay EMIs on time to get good credit score. If lenders see repayment delay, defaults, write-offs, they won’t sanction loans.

SEE ALSO: IndianMoney Review: How To Manage Debt?

3. Space out credit applications:

Don’t apply for multiple loans with different banks at the same time. Hard enquiries (This is when banks check credit score) affects credit score. Multiple loan applications convinces banks, you are in financial trouble and could struggle with repayments.

4. Secured vs Unsecured loans:

Always maintain 80:20 unsecured loans to secured loans, to get good credit score. In loan against property, car loan, home loan or loan against security, banks have collateral as guarantee. Secured loans have lower interest rates.

5. Don’t stand loan guarantor:

Standing loan guarantor affects credit score. On loan default, credit score is severely impacted. Stand loan guarantor only for family and friends you really trust.

SEE ALSO: IndianMoney Review : Mobile Banking Safety Tips

6. Repay your loans on time

Be sure to repay your loans on time. If you repay your loans on time, you will get a good credit score. If you have availed unsecured loans such as a personal loan or even a credit card, pay off this debt quickly. Unsecured loan is a loan without collateral. An unsecured loan charges a very high rate of interest. You must repay this loan as fast as you can. You must break your fixed deposits and use the money, to pay off the unsecured loan.

A personal loan charges you an interest of around 15%-17% per year. A credit card could charge you an interest as high as 30%-36% per year. Your fixed deposit offers you interest of around 7% a year, after taxes. What use is the interest you get on the fixed deposit, if you are paying 2 or 3 times more interest, on your personal loan or on the credit card dues?

7. Avoid too many enquiries for a loan

You apply for a loan at a bank. The bank makes a credit enquiry, which gets recorded in your credit report. If you make too many enquiries for loans with different banks, you are viewed as credit hungry. Banks will not lend you money if they view you as credit hungry. Banks feel you are desperate for that loan. Your credit score is also affected if you make too many enquiries for loans. If you have a bad credit score, try not to make too many enquiries for a loan.

If you have a bad credit score don’t lose heart. There are ways for you to improve your credit score.

2. Tips to improve credit score

  • Understand how credit score is calculated: Credit Information Companies maintain a database on the track record of repayments and this has a high weightage on credit score.
  • Clear outstanding credit card dues: Control credit card spending. Clear credit card outstanding dues on time, to enjoy the interest-free period. Never opt for minimum balance on credit card. You have to pay high interest on outstanding dues of 24-36% a year. You could struggle with repayments affecting credit scores.
  • Clear mistakes in credit report: Get typo errors corrected in a credit report. If you appeal for error rectification, the lender has to address the issue in a month. Once errors are rectified, credit score improves. Apply for fresh credit only when outstanding loans are cleared. A good credit score means loans are sanctioned quickly.
  • Don’t deactivate old credit cards: It’s popularly believed that old credit cards must be deactivated. Timely repayments on an old credit card over long periods of time increase credit score. If you have an old credit card with a long history (track record) of repayments, keep it open and improve credit score.
  • Make repayments of big loans on time: If you have availed a car loan or home loan, make repayments in time. Repaying high loan EMIs in time builds a credit score.
  • Keep credit utilization in check: When it comes to credit cards, maintain credit utilization within 30%. If the credit limit is Rs 1,00,000 a month, keep credit utilization below Rs 30,000. Financial discipline leads to a good credit score.
  • Get a secured credit card: A secured credit card (Fixed Deposit is collateral) charges lower interest rates. A secured credit card helps make timely repayments. Axis Bank, ICICI Bank, SBI, Kotak Mahindra Bank among others, offer secured credit cards.

Why was your home loan application rejected?

Banks never like to lend blindfolded. They would find as much as possible about you before they sanction you a loan. When you avail a loan from your bank, the bank creates a credit information report (a detailed report on your loan repayments).Your credit information report is then sent to Cibil, which then assigns a score between 300-900. A score of 750 and above, means your loan is easily sanctioned. A score of 700 is also fine. What happens if your cibil score is below 700? Is this the end of the road for you? No, definitely not. There are ways to improve your credit score.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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