7 Ways to Improve Your Credit Score

Your credit score plays an important role in getting your loan/credit card application approved. Not just that, your credit score has also started being a determinant in the interest rate you pay for the loan. Therefore, if you plan to apply for a loan in the near future or foresee the need for a loan in the not-so-distant future, you need to keep an eye on your credit score. A poor credit score or lack of credit history can jeopardize your chances of getting a loan or a credit card. If you have a poor credit score or insufficient credit history, what should you do? In this post, I will discuss a few methods to improve/build your credit score.

#1 Pay Your Loan EMIs and Credit Card Bills on Time

This is 101 of maintaining a good credit score. You cannot have a good credit score if you do not pay your bills on time. Timeliness of payments should be one of the critical determinants of your credit score. If you can’t pay your EMIs and credit card bills on time, forget about a good credit score. Now, delay in payments could be because of two reasons. If you are lazy and simply not disciplined enough to make payments on time, opt for auto-debit from your bank account. If you regularly find yourself short on money to make payments, you have a much bigger problem at hand. It could be a behavioral problem if you can’t resist the urge to spend. Or it could be a financial problem where the numbers simply don’t add up i.e. your cash flows are simply not enough to support such debt payments. In such a case, you need to take some remedial measures.

#2 Check Your Credit Report

You can find a solution to the problem unless you know there is a problem. You must check your credit report regularly and get any discrepancies rectified. Yes, sometimes, you may get penalised for no fault of yours. Now, you can download one credit report (per credit bureau) per calendar year absolutely free of cost. Therefore, keep a tab on your credit score (report) on a regular basis. If there are any errors, raise a dispute with CIBIL (or any other credit bureau). Do note CIBIL will only forward your request to the concerned credit institution. A credit bureau will make changes to your report only on confirmation from the concerned credit institution (say, the bank). Therefore, in case of any discrepancies, do get in touch with the concerned bank.

#3 Figure out the Reason for a Poor Credit Score

In continuation with the above point, there could be genuine reasons for a low credit score (and not just a discrepancy). Is the poor score due to late (or missed) payments or due to high utilization? Though the calculation of credit score is done using proprietary methods, it is easier to understand the late payments will affect your credit score adversely. However, many a times, we underestimate the importance of higher credit utilization ratio on our credit score. A consistently high credit balance indicates higher repayment burden. This may affect your credit score adversely. Perhaps, with this knowledge at your disposal, you may be able to bring down utilization levels. Alternatively, you can ask the bank to increase your credit limit or apply for another card (of course, there are many caveats).

#4 Take Credit Card against Fixed Deposit

Now, we are running into a chicken and egg problem. If you already hold a credit card and have a running loan, you can be regular with your payments and your credit score should gradually improve. However, if you do not have any credit history and finding it difficult to access for this reason, it may be a good idea to go for secured debt. For instance, you can open a fixed deposit and take a credit card against the fixed deposit. Since the credit is secured, banks wouldn’t have much problem in giving this credit card to you. Spend on that card responsibly and make your card payments on time.

#5 Too Many Credit Enquiries Will Affect Your Score

When you apply for a loan or a credit card, the bank (or the credit institution) access your credit score as part of the sanction process. Such enquiries for credit score are called hard enquiries. Too many hard enquiries demonstrate credit hungry behavior on your part. Such behavior is unlikely to go down well with the credit bureaus. If you are looking for credit, just don’t start applying indiscriminately. Do your research and finalise a couple of lenders before approaching them.

#6 Seek Professional Help

You can also approach a credit repair agencies to help you with building credit score. Since you have spent money to access their service, it is possible that you will be more inclined to follow their suggestions. However, the problem lies in identifying the right agency. There are many that offer quick solution to your credit score problems. It is good to stay away from such players. Rebuilding your credit score is a gradual process and can’t be done overnight.

#7 Don’t Close Old Credit Card Accounts

I have read conflicting accounts of whether closing old credit card accounts affects your credit score adversely. Some say the duration of your credit history also affects your credit score. Older accounts have benign effect on your score. This could be due to the reason that your overall card utilization will go up, which may affect your credit score adversely. But again, the reason is not just closure of cards. Since the credit score calculation methodology is proprietary and the reason is not very intuitive either, I am not sure if this is true.

Leave a Reply