5 ways to improve your credit score

If you’re planning to borrow money through a loan, or if you want to apply for a credit card, there’s one metric that you need to keep your eye on. And that is your credit score. This 3-digit number - generally ranging between 300 and 900 - can make or break your financial plans.

You see, with a good credit score, you can avail loans easily, enjoy speedy approvals, and get affordable rates of interest. You can also enjoy higher credit limits on your credit cards. But with a poor credit score, you may find it tough to get loan approvals. And even if your loan application is somehow approved, the bank or NBFC may charge a higher rate of interest for you.

Don’t like the sound of this? Then it’s best to ensure that your credit score is at least 750. Interestingly, a report from Paisabazaar shows that only 6 out of 10 salaried borrowers and 5 out of 10 self-employed borrowers have credit scores of 750 or more.^[1]

If you find yourself among the group with less-than-favourable credit scores, here are 5 ways to give your credit rating a boost.

1. Pay your EMIs on time

This is the most definite way to ensure that your credit score improves. However, it is not a quick fix solution. If you’ve been falling back on your EMI payments or postponing your credit card dues, it may be time to step up your game and fix this. Set timely reminders, allocate a budget for your loan and credit card repayments, and make use of automated payments wherever possible. This way, you can ensure that you don’t miss any payments.

2. Limit the amount of debt you take on

Another way to improve your credit score is to be smart about the amount of debt that you can bear. If you are already finding it difficult to meet your current EMIs, you may want to put off taking on a new loan or a new credit card. Instead, focus on clearing your existing debts before availing another loan. This way, you can give your credit score a boost. Also, you can repay your debt comfortably instead of falling into the vicious cycle of a debt trap, where you take new loans to repay old ones.

3. Opt for a longer repayment tenure

What’s one of the leading causes of delayed EMI payments? Affordability, of course. Most people miss a payment because they are unable to meet the cost of debt. Fortunately, there’s a quick and easy way to work around this. You can opt for a longer repayment tenure. This effectively brings down the EMI amount, so you can pay your instalments more conveniently. So, if you’re already on a tight budget and you want to take a new loan, remember to choose a longer repayment period. This ensures that your credit score isn’t impacted adversely.

4. Choose a healthy mix of credit

If you’ve been prompt with your payments but still find that your credit score isn’t improving, your credit mix may be the reason. Perhaps you’ve been relying too much on just one kind of credit, or perhaps, have too many unsecured loans. To rectify this, try to maintain a healthy credit mix - one that has both secured and unsecured borrowings. You can also include short-term and long-term credit to bring in more diversity. This improves your credit worthiness and therefore, your credit score too!

5. Check your credit report for errors

Occasionally, it may happen that you’ve gotten everything right, but your credit report still shows a less-than-ideal score. In that case, you may have to review your report and check for any errors that may be pulling your credit score down. For example, some of your repayments may not have been updated in your report. Or your credit mix may be reflecting an older set of borrowings. So, check your report regularly and if you spot any errors, get them rectified so your credit score accurately reflects your credit worthiness.

Summing up

Contrary to popular belief, eliminating debt altogether is not the best way to improve your credit score and maintain it at a desirable level. Debt is essential, because that gives credit information companies valuable information about your ability to repay the money. The trick is to maintain a healthy level of debt, and to take on the right mix of credit options. That way, you can build up a good credit history without straining your finances.

[1] https://www.paisabazaar.com/wp-content/uploads/2017/10/Making-India-Credit-Fit-Paisabazaar.pdf