A credit score is a crucial pillar of your financial well-being. And, if your score is far from perfect, it’s worth your time and effort to bring it up. The better your credit score, the better are the deals you get on future loans and credit cards. Increasing your score by a few points can even help you save thousands of rupees on the interests you pay on your loans.
If your credit score is “bad” and you want to make it “perfect,” check out these excellent tips from the credit experts at CreditMantri, the leader in the consumer credit landscape in India.
10 Steps to Transform your Credit Score from Bad to Excellent
Step 1: Understand your Credit Score
An authorised credit bureau calculates your credit score. In India, the four major credit bureaus are Equifax, CIBIL™, Experian, and CRIF High Mark. The bureaus calculate your financial data from all lenders to compute your score. The credit score ranges from a low of 300 to a high of 900.
|Credit Score Range||Rating|
|750 and above||Excellent|
|700 to 749||Good|
|650 to 699||Fair|
|600 to 649||Bad|
Not sure where your score lies? You can check it for free quickly at CreditMantri. Your score is calculated based on your various financial decisions – whether you pay off your loans and credit card bills on time, how responsible are you with credits, the overall debts you owe, type of debts, etc. Once you know your current credit score and where you stand, you can take the right steps to improve it.
Step 2: Check your Credit Report
While tracking your credit score is a good starting point, you need to get in detail if you wish to improve your credit score. Get a copy of your credit report from sites like CreditMantri. Go through all the transactions listed on the report. Identify errors in the report and get them rectified immediately.
Since your credit score is based on what’s recorded on your credit report, ensuring that there are no mistakes on the report is essential. If you notice any error, you can raise a dispute with the bureau and get it sorted.
Step 3: Always Pay your Bills & EMIs on Time and in Full
This is the single most critical action that you can take to improve your credit score. Paying your credit card balance in full and on time as well as repaying loan EMIs on time is key to improving your credit score.
Your credit report contains all details about your payment history, like – delayed or missed payments. Every time you miss a credit card bill or loan EMI, it’s noted on your credit report and drops your credit score by a few points.
Here are a few tips to help you settle bills on time:
- Set up automatic transfers on your salary account. Every time your salary gets credited to your account, move money automatically from your bank account to your loan/credit card accounts. This way, you don’t make the mistake of forgetting to pay credit card bills and EMIs on time.
- Create an honest budget. Scrutinise your expenses down to each rupee. This gives you a clear idea of where your money goes. You can quickly spot whether you’re spending money for fun and frivolous expenses. It helps you stay on track and set aside the required amounts to settle your bills.
- Try to follow the mantra – pay, save, and then fun. It means your priority should be paying all your expenses. This includes credit card bills, EMIs, utility bills and other essential spends. The next focus is to save. Only after these should you spend your money on fun and other non-essential expenses.
Step 4: Settle Outstanding Bills
If you have any outstanding credit card bills or loan EMIs, ensure that you pay it off to improve your credit score. As mentioned above, the payment history accounts for the significant portion of your credit score. So, make sure to settle any outstanding bills to bring your accounts current.
Avoid paying only the minimum balance on your credit card. It’s not good for your pocket as well as your score. When you settle only the minimum balance, you’re charged interests on the pending balance. Also, it increases your overall balance, which in turn brings down your credit score.
Step 5: Keep an Eye on your Credit Utilisation Ratio
Besides making timely payments, your credit utilisation ratio plays a crucial role in determining your credit score. It’s the ratio of how much money you have spent on your card to the overall available credit limit. The smaller the ratio is, the better it is for your credit score. Ideally, your credit utilisation ratio should remain less than 30% of the available credit.
Step 6: Do not Close Old Credit Cards
One of the biggest mistakes that people do unknowingly is to close old credit cards. You may have got a new credit card with a bigger limit and better benefits. But that doesn’t mean you have to close your old card.
There are several reasons for insisting on this – leaving old credit cards open gives you longer credit history. The length of your credit history accounts for 10% of your credit score. Thereby, keeping an old card open can boost your score. Similarly, having an old card increases your overall available credit limit, which in turn lowers your credit utilisation rate, thereby improving your credit score.
Step 7: Avoid Applying for Unnecessary Loans/Credit Cards
If you’re on a credit repair mission, then it’s a good idea to avoid applying for new credit cards or loans. Every time you apply for a credit card or loan, it dings up a hard inquiry on your credit report. Though not significant, hard inquiries harm your credit score. And, multiple hard inquiries within a short time can bring down your score.
Step 8: Don’t Be Afraid to Ask for a Credit Limit Increase
Check with your bank/credit card company to see if you’re eligible for a credit limit increase. The reason for this is simple: the higher your credit limit, the easier it is to stay within the 30% credit utilisation ratio. This can lower your credit utilisation rate in the long term, which helps boost your credit score.
With that said, ensure that you’re responsible with the new increased credit limit. Going over your means and spending more just because you have a higher limit gets you back to square one and can even lead to debt traps.
Step 9: You Need Credit to Build Credit
If your score is low due to a zero credit history, you need to take on new credit. If your low credit score bars you from qualifying for a credit card, you can opt for a secured credit card that comes with easy eligibility. Alternatively, you can also consider a small credit builder loan. Paying your credit card bills/loan EMIs on time can help you build a good repayment history over time. This, in turn, builds your credit score steadily.
Step 10: Keep an Eye on Your Credit Score Regularly
If you’re looking to improve your credit score, then you must check it regularly. Credit experts recommend checking your credit score once every 3 – 6 months. This gives you an idea of where you stand, whether your efforts are paying off and what you can do to improve it. It’s an excellent way to track your progress.
Credit scores don’t magically go from “bad” to “perfect” within a day or two. Credit repair takes planning, time and, of course, patience. Once your credit score starts improving, avoid making any costly credit mistakes that can unravel your hard work.
A good credit score is the cornerstone of financial well-being. Follow the steps listed here and watch your score climb.