The importance of credit score cannot be overemphasized. It is pretty much common knowledge that credit score is a non-negotiable factor when it comes to getting credit.
We bring you a real-life situation.
Anil and Prithi are a young couple based out of Mumbai. While Anil handles sales at a multinational, Prithi looks after her event management business. Once they decided to settle down in Mumbai, they decided to buy a flat. They were both earning good incomes and had a car loan which was almost nearing closure. They scouted for homes and finally managed to find one closer to their workplaces.
They got all their documents ready and applied for a home loan. They were in for the shock of their lives when the loan was rejected due to a low credit score. They couldn't understand why they had a low credit score.
For the first time, they looked for their free credit score and realized that Anil's score stood at 600 and Prithi's stood at 550, both of which were below the requirement of the bank that demanded at least 750 for underwriting a home loan.
When they looked for reasons, they found that they never paid their credit card bills in full. They had amassed a huge credit card debt and had missed/delayed some installments on their car loan too. In addition, they had applied to some credit cards in the interim, which were again denied and contributed to repeated hard inquiries and a low credit score.
As we can see from the above example, there are many things that contributed to their low credit score and they were not even aware that they had a low credit score.
Credit scores range between figures of 300-900 with the higher scores signifying better grade of creditworthiness. A credit score is the indicator which conveys to your lender the probability of you defaulting your next loan/credit card outstanding bill. With a good score, the lender will know that you are a creditworthy borrower.
While any score above 750 indicates a high degree of creditworthiness, anything more than 800 or an 850 not only gives you any time access to credit, but also gives you an edge in being able to negotiate with your lender on interest rates and other terms and conditions.
Ways In Which You Can Achieve Good Credit Score?
We have seen the situation of Anil and Prithi who could not manage to get their home loan approved due to their low credit scores. How do they need to focus on if they are serious about bettering their score?
We bring a few pointers that should not only help the couple, but many of you who are looking for a high credit score.
Check Your Credit Score Regularly
As we saw above, Anil and Prithi had never bothered to check their credit scores. RBI has allowed you to check scores and obtain a credit report from any of the credit bureaus free of cost once every year. You can also go in for their paid membership plans.
Or you could check your score anytime for free here. It is very important to know where you stand before planning your future points of action. If you are planning to avail big-ticket loans such as education loans or home loans in the near future, make sure you check your score at least 6-8 months earlier so that you would have adequate time on hand to make bring in improvements if required.
Never Miss a Single Payment
Every single EMI payment or credit card outstanding payment made on time adds to your credit score. If you are one among those having a decent credit score, then you must be taking care of your payments.
If are the one remembering about your payment at the last moment, we advise you to go in for an automated debit facility from your account. Still better if you can set a date closest to your salary credit so that your mandatory payments are debited first thing from your account. You could use the rest for your investments and spending.
Anil and Prithi committed this big blunder of not paying their credit card bills and loan EMIs on time, which cost them their credit score, in addition to the burden of paying huge amounts of interest on credit card outstanding, late payment fee and added penalties.
Repay Outstanding Balances, if any
Your credit report is a good point to know if you have any outstanding balances on your loan or credit card accounts. If your credit report shows up any balances, check with your lenders if the reporting is genuine. At times there might be an outstanding balance shown due to an error. Get the error rectified at the earliest.
If you have some balances, it is better to hasten and clear them off. Once the outstanding balances are cleared, your credit scores should gradually see an upward movement.
Concentrate on Keeping your Credit Utilisation Low
Credit Utilisation ratio is the ratio of your credit card spending to the credit limit allotted. A higher credit utilization ratio signifies that you are a credit hungry person and live on credit. This factor is not favored by the credit bureaus and earns you lower credit scores.
So, if you are looking to improve your credit score or reach the perfect credit score, concentrate on keeping your credit utilization low at 30%. You would need rein in your expenses on the credit card.
Getting a second credit card or trying to increase the credit limit may also be good ideas if you are faced with issues of high credit utilization ratio. But under no circumstances should you increase your spending after increasing your credit limit. This would further lower your credit score.
Do Not Apply for More Lines of Credit With a Low Credit Score
Credit should always be applied out of necessity and not a compulsion, just because it is readily available or someone else is applying for it. Each application for credit results in the lender inquiring for your credit score with the credit bureau. Each of this inquiry is called a Hard Enquiry. Increased number of hard inquiries over the previous one year causes a drop in your credit score.
So, if you have been looking to boost your credit score, then do not make applications for credit unless and until there is an absolute emergency. Anil and Prithi committed this folly of repeatedly applying for credit cards even after a couple of rejected applications.
Credit Score improvement takes concentrated and sustained responsible behavior towards credit. While a single missed payment can take it down, getting your score up is not an overnight affair. It requires the same seriousness and dedication of a diet or fitness program.
The only way is being responsible is by availing only as much credit as you can pay off comfortably. And keep checking your credit score regularly to know how well you are performing on the track to that perfect credit score.