6 ways to improve your credit score
December 15, 2019
Your credit score is a 3-digit number that reflects your credit worthiness as a borrower. Do you repay your loans promptly? Have you used a significant amount of credit over the course of your financial history? Is there a high risk that you might default on your repayments? These are the questions that your credit score answers.
When you apply for a loan, lenders like banks and financial institutions look at your credit score and evaluate your credit profile before they approve your application. Your credit score not only plays a major role in determining your eligibility to borrow, but it also influences the rate of interest you will be charged. This is particularly true in the case of small Personal Loans and instant loans, where you do not need to provide a collateral.
If your credit score is excellent, you can take advantage of low rates of interest and enjoy an instant e-approval on your loan. That’s how instant loans are processed online. So, to increase your chances of your loan applications being approved, you will need a healthy credit profile. Here’s how you can improve your credit score.
Be prompt with your EMI payments
If you have other debts in your portfolio, ensure that you pay your Equated Monthly Instalments (EMIs) on time. Repayments influence your credit score significantly. If your credit history reveals that you were not very diligent about repaying your loans on time, it could interfere with your ability to borrow in the future. Even if you succeed in repaying your existing loans entirely before applying for a new one, your track record of late EMI payments will continue to remain on your credit report.
Pay your utility bills on time
Your pattern of utility bill payments also impacts your credit score. If you put off paying telephone bills, internet charges, and other utility expenses until you receive a reminder, you are putting your credit profile at risk. Set up reminders on your phone, so you can stay ahead of your monthly utility and cell-phone payments. Even with apps that allow you to avail of services right away and pay later, you need to ensure prompt payment before the deadline is past.
Lower your credit utilisation ratio
At any given point, your credit utilisation rate is calculated by dividing what you currently owe your lenders (in loans and Credit Card dues) by your total credit limit. The lower this percentage is, the better your credit scores are. Ideally, it’s advisable to have a credit utilisation ratio of 30% or less. A low ratio indicates that you are good at managing credit. One way to improve your credit utilisation ratio is to avoid maxing out your Credit Cards. Another thing you can do is to pay off debt promptly.
Don’t take on too much debt at once
Taking on too much debt over a short period isn't the smartest move if you want to get your credit score up. In fact, it could work against you and bring your credit health downward. Availing of multiple loans will tell a potential lender that you are suffering from a ceaseless cycle of insufficient funds. It also indicates that you already have your hands full with a series of EMIs to repay, making it harder to get a new loan. The best course of action is to take one loan, repay it entirely, and then look into borrowing again if you need to.
Maintain a healthy credit mix
Your credit portfolio must be a healthy mix of secured and unsecured borrowings and long-term and short-term dues. If you have taken too many large loans in the past, opt for small Personal Loans or instant loans in the future if you need to meet an emergency expense. Alternatively, if you have not borrowed funds in the past, you won’t really have a credit history. By obtaining a Credit Card to finance your regular purchases, you can begin creating a credit profile. However, make sure you pay your Credit Card dues on time to avoid poor scores.
Limit hard inquiries
A hard inquiry is one of the first steps taken by a potential lender when you apply for a loan. The lender goes over your credit report to determine whether or not to grant approval. A hard inquiry has a small negative effect on your credit score, since it temporarily brings down your ranking. So, before you formally apply for small Personal Loans, instant loans, or other kinds of borrowings, research your eligibility. You don’t want to risk a hard inquiry for an application that may be denied.
By weaving these habits into your spending pattern and by paying heed to these tips, you can improve your credit score in the long run. This makes it easier for you to obtain a loan later in life. ICICI Bank’s credit builder programme is another tool that you can use to improve your credit score and build your credit worthiness. And once you have achieved a healthy credit score, remember that the same habits that helped you improve your credit profile will ensure that you maintain it.
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