How to improve your Credit Score?

Are you struggling to get a loan because of a poor credit score? Well, you are not alone. A large number of people have to go through a tough time trying to get a loan without a good credit score.

Many people give up when they find out that their score is below-average. However, truth is that you can always improve your score, no matter how bad it is.

If you want to improve your chances of getting a personal loan, home loan, etc. at favourable terms and attractive interest rates, then the following tips can be of great help:

1. Avoiding Late Payments

Did you know one of the biggest reasons behind a poor CIBIL score is late payments? Most of the credit rating agencies give the highest weightage to the payment history of an individual.

If you are able to pay the credit card bills, loan EMIs, etc. on time then you are likely to have a high credit score. However, if you are frequently late on the payments, then your score can take a high damage.

By trying to be more punctual with your payments you can gradually improve your credit score. In fact, there are many things you can do to develop this good habit. For instance, you can download an app on your phone that can remind you when a payment deadline is approaching. Alternatively, you can set-up auto-debt instruction for your card payments.

2. Lowering Credit Utilization

The way you use the credit cards can directly affect your credit score. That said, one of the easiest ways to improve yours is to lower credit utilization ratio.

Credit utilization ratio is the ratio of the amount of credit you use per month to the amount of credit available to you. So, if you spend about Rs. 40,000 per month using the credit card and the limit on the same is Rs. 1 lakh, then the credit utilization would be 40%.

Ideally, your utilization ratio should be below 30% or 35%. So, by lowering yours you can improve your score.

There are many ways to lower your utilization ratio. The best way is to reduce your expenses on credit cards (easier said than done). Alternatively, you can also increase the credit limit on your card so that the ratio reduces automatically. Continuing with the previous example, if your monthly spending is Rs. 40,000 but your credit limit is increased to Rs. 2 lakhs, then your utilization ratio will go down from 40%to 20%.

3. Avoiding Minimum Payments

Most of the credit card providers offer the option of minimum payments. In this, you don’t have to pay the full credit card bill for a month if you can just pay 3%-5% (varies across banks) of the outstanding amount. The remaining balance is carried over to the next month and added to the next bill.

Technically, this will preserve your credit score.

While you don’t have to pay any kind of penalty when you make a minimum payment, the problem is that you can accumulate debt quickly due to high rate of interest on credit cards.

The reason why you chose to make the minimum payment was that you had a cash crunch. With the high rate of interest and subsequent purchases on the same card, the debt can shoot up really fast.

Only a matter of time before you miss minimum payments too. Eventually, it will affect your credit score.

If you are struggling with high interest cost, it may be a good idea to take a credit card balance transfer or take out a personal loan to get favourable repayment terms (or get a lower rate of interest).

Coming back, if you want to improve your credit score, then it’s important that you make a habit of paying your credit card bills in full. If you are unable to do so, then let go of some of your luxuries such as eating at restaurants or buying new clothes, etc. for the time being.

4. Fixing Credit Report Errors

This is a low hanging fruit.

Believe it or not- your low CIBIL score could be a result of errors in the credit report. Here is how you can correct this and improve the score:

• Get your credit report from CIBIL or any other relevant agency and go through the details.
• Check personal information, repayment history, bank accounts, credit card accounts, etc.
• If there is misprinted information, accounts that you don’t recognize or even transactions that you are not aware of, then immediately contact your bank. These could either be a result of a mistake on the bank’s or agency’s behalf, or a possible case of identity theft. Either way, finding and fixing the problem can greatly improve your score. Moreover, you can even protect yourself from financial loss due to identity theft (if that’s the case).
• A point to note is that CIBIL or any other credit bureau cannot rectify errors in your credit report on their own. These bureaus will simply pass your dispute to the concerned credit institution. The change has to come from the concerned bank. Therefore, when you identify any error, do follow up regularly with the concerned bank too.

5. Improving Credit Variety

An easy yet effective way to improve credit score is to add more variety to the credit portfolio. For instance, if your credit history is only based on repayments of credit card bills, then maybe you can get a small personal loan or a car loan. This can have a huge impact on your credit score.

6. Case of No credit history

Many times, your loan application may be rejected not because of poor credit score but because you have no credit history.  Therefore, irrespective of how much you hate credit, it is always important to build credit history.

You can apply for a credit card, spend within limits and build credit history over a period of time. In case you are finding it difficult to get a credit card, apply for a credit card against fixed deposit.

At the end, it boils to these very basic financial tenets.

Don’t spend more than you can afford to. Don’t borrow more than you can repay. Pay your dues on time. Seek remedy (by reducing the cost of the loan or liquidating investments) if you are struggling to repay debt.

The Journey of Credit Improvement

While it’s true that in most cases you can improve your credit score, the process may not be always easy. Although the tips given above are quite effective, they may not necessarily get you the desired results. This is because your financial and credit situation could be complicated and different than others. This is where a professional can help.

At Credit Sudhaar, we have handled hundreds of such cases. By going through the credit report in detail, we can advise the best possible option for you and lay down a guideline that you can follow for the fastest results.

In the end- it’s up to you. If you are capable of understanding how credit score calculation works and how your financial decisions affect your score, then there is no need to seek professional help. However, if that’s not the case or you want the best results, then professional guidance is strongly recommended.

This sponsored post has been contributed by Arun Ramamurthy, Co-Founder, CreditSudhaar. Credit Sudhaar offers credit advisory services in India. The views expressed are personal.