How to Maintain a Good Credit History
Maintaining a healthy credit history goes a long way in helping you get a loan quickly, smoothly and on attractive terms. It is good to know that you can apply for a car loan or a credit card and not worry about being rejected. A strong credit history helps you get problem-free access to credit when you need it. Lenders tend to look at your credit history before making a decision on whether to approve your loan application as your credit health is an indication of your financial reliability and trustworthiness. Keep in mind that a negative mark on your credit history can stay on your credit report for many years.
How to maintain healthy credit history?
Equifax is one of the 3 main credit bureaus that are authorised by the RBI to operate in India. Having a good Equifax credit score is a direct reflection of how responsibly you use credit. Here are some practical steps you can take to maintain a healthy credit history.
Pay your bills on time, every time:
Your repayment record forms up to 30% of your credit score and is, therefore, a big factor in maintaining a good score. Paying your credit card bills and loan EMIs on time in full and on or before the due date is vital to having a good Equifax score. Every single missed, delayed or partial payment is reported to the credit bureau and too many such incomplete payments can adversely affect your credit rating.
Set up a Payment Schedule:
Set up a payment schedule so that you do not miss repayments by mistake. You can provide your bank with a standing instruction to debit your account to pay your credit card bill and EMI amounts every month. This prevents a drop in credit score due to inadvertent missed or late payments.
Keep all your information up-to-date and review periodically:
Make sure that you always keep your credit information updated. Any change in phone number, residence address, etc., should be reported to the credit bureau.
It is important to periodically review your credit report for any errors that might be dragging down your score. Obtain a copy of your Credit Information Report (CIR), or credit report, and check for any reporting errors. For instance, your report may not reflect the updated status of newly closed loan account, or may have an incorrect credit limit. Some discrepancies could also be the result of ID theft and fraud. Report these errors to the bureau immediately so that they can be rectified immediately. Failure to update important information could impact your credit history adversely.
Keep your credit card balances low:
Keep your credit line utilization low. It is also important not to spend too close to your credit limit consistently – ensure that you spend less than 50% of your total credit limit.
Do not apply for multiple sources of credit:
Do not apply for multiple credit cards or loan products at the same time. Every time you apply for credit, the lender makes an enquiry regarding your credit score and history. Too many such enquires within a short time has a negative impact on your credit score because it implies that you are desperate for credit and need to apply to several sources simultaneously. Furthermore, too many applications, without corresponding approvals, causes a further decrease in your credit score. Apply only where you think you qualify and have the best chance of being approved. If you do not have a good credit score, it is well worth the while to take time to improve your credit score and strengthen your credit history before applying for a loan or credit card.
Diversify your credit lines:
Having a mix of secured and unsecured credit products like loans and credit cards will help in maintaining a healthy credit history – provided you pay your dues on time. A secured loan is one that involves collateral – like an auto, home or gold loan. Unsecured credit refers to a personal loan or a regular credit card which do not involve pledging any security. Credit scores generally rise when you have a combination of secured and unsecured credit as it denotes that you are able to manage both types of credit.
Use available credit:
Some people are under the mistaken impression that not having any loans or credit cards to their name helps them have a good credit score. This is not the case. Lenders want to see a long credit history to judge if you have a good repayment record. Not having any credit history will damage your chance of getting any credit. Lenders might consider someone with no credit cards as a higher risk and might not be willing to lend to them, as opposed to someone who has a record of managing credit cards responsibly.
At the same time, you need to be careful about having too many open accounts that might possibly put you in debt. If you have been managing credit only for a short while, do not apply for, or open, a lot of new accounts too quickly.
Close new rather than old accounts:
This is simply because closing old credit cards shortens your credit history. Lenders like borrowers with a long credit history as the have a sufficiently long track record for evaluation. If you want to consolidate your credit card debt, pay off and close your new cards while retaining your older cards.
New to credit?
If you are new to credit and want to develop and maintain a healthy credit profile, start with a small consumer durable or a secured loan or secured credit card to take the first step in building your credit history. Those who are new to credit might face problems in being approved for a credit card or loan, as their lack of credit history might cause lenders to reject their application.
You can obtain a credit card against a fixed deposit, and manage it responsibly by paying off dues on time. This will help build a credible credit history.
Maintaining a healthy credit history is not hard if you commit to paying all bills on time and avoid any defaults. It will help you become eligible for the best loan offers and secure the kind of credit you desire. Make a commitment to look after your financial health today.