A credit score is basically a three-digit number, ranging from 300 to 900, which reflects your creditworthiness. Every lender refers to your credit score prior to approving your application for loan/credit. Any figure higher than 750 is considered a decent credit score.
In India, your credit score is generated by four major credit bureaus that have been licensed by the RBI to create credit reports (credit score is included in these reports).
These bureaus are CIBIL, CRIF Highmark, Experian, and Equifax. The credit score generated by each one of them might be different from the others, as they use their own mechanisms. However, the chances of big variations are quite low. Among these, CIBIL is the most popular with borrowers and lenders.
Now that we know what’s meant by credit score, let’s look at what you can do to improve yours in 2020. Before we go ahead, please note, no matter what the times might be like, the fundamentals of improving one’s credit score remain the same. In fact, they’re more relevant today than ever.
One of the major factors that go into the calculation of credit score is your repayment history. It holds close to 35% weightage in credit score. Therefore, if you’re serious about maintaining a healthy credit score, you should try your best to keep a clean repayment record, with no defaults. Never defaulting on your credit card bills and loan EMIs is the best way of giving lenders confidence in your repayment ability.
Before approving your loan application, creditors want to understand how you handle different types of credit. Hence, it can be extremely beneficial to service different credit types, in order to enjoy a good credit score.
Having both unsecured and secured loans, apart from a responsibly used credit card can create a healthy credit mixture, giving lenders a good idea about your creditworthiness. Please note, credit diversification is also given a certain percentage in credit score calculation.
Low Credit Card Utilization
As per experts, you should keep your credit card utilization under 30% to enjoy a good credit score. Keeping it below this percentage gives lenders the impression that you’re not hungry for credit. As a result, defaulting on your credit card bills or maxing out your card can make it very difficult for you to maintain a decent credit score.
You should use your credit card only at times when it is very important, and you have no other option. Limiting your card usage this way can also help you steer clear of unwanted debt, and contribute to your financial stability.
Length of Credit
Once you take your first credit from a lending establishment, it will get updated in your credit report and impact your credit score only after the passage of a few months. Normally, it takes anywhere from 3 to 6 months for it to reflect. Applying for a loan during this time, when there is no credit history for you to show, can make it difficult for the lender to assess your credit profile.
Having serviced a credit card or a loan for a longer time period can give lending establishments a good understanding of your credit behavior, and also contribute effectively to your credit score.
Staying Away from Multiple Credit Applications
It’s common for people to apply for loans with multiple lenders whenever they are in desperate need of money. However, please note, this can go against you. Every time you submit a loan application with a lender, they make a hard inquiry into your credit report, thereby slightly impacting your credit score. Such multiple hard inquiries can have a potential negative impact on your score.
In addition, if the credit is rejected, that too can reflect negatively on your creditworthiness. Therefore, avoid applying for credit with multiple lenders if you’re serious about maintaining a good credit score.
Also, Read This: How Can A Personal Loan Improve Your Credit Score