Maintaining a healthy credit score is one of the most important financial responsibilities. A credit score is the reflection of your creditworthiness. It is a three digit number assigned by the credit bureau based on your past credit behaviour. Today, many Indians are suffering from bad credit and they are unable to improve it because of lack of awareness. Having a poor credit score can result in denial of credit when you apply for quick finance through a loan app orconventional lender. It also impacts your credit card limit. Even if your loan application gets approved you will get the finance at a very high interest rate and with minimal features.
Hence, it is very important to maintain a healthy credit score, especially if you are planning to apply for a credit card or avail a personal loan. But to understand that you first have to know what is a credit score and the factors that influence your credit score.
What is a credit score?
A three-digit number ranging between 300 and 900 befits the description of a credit score. Your credit score represents your creditworthiness. Whenever you apply for an unsecured credit whether through a credit card or a personal loan, lenders run a quick check through your credit profile. Having a good credit score assures the lender of your good credit behaviour and they mark you as a low-risk borrower and potential customer. Thus, they may offer you the loan at a lower interest rate and suitable features on your loan. But if you have a poor credit score, the lender would mark you as a risky borrower. They may either reject your loan application or offer you one at a high interest.
In case, your credit score is not that great, you can try availing the credit using a loan app. They have a high chance of approving your loan as the loan apps used multiple modern technologies like AI and machine learning to calculate the risk associated with your account. They don’t just check your credit score but several other parameters too.
Factors that impacts your credit score
As already mentioned a credit score is a reflection of your credit behaviour. So, if you have missed your EMIs payments in the past then your credit score will suffer. Exceeding your credit card utilization limit which is 30 per cent of your total approved limit can also impact your credit score. Running multiple loan enquiries at once is another factor that can impact your credit score. In addition to this, missing your utility billsand discrepancies on the credit report can also impact your credit score.
How to Maintain a Good Credit Score: 5 Handy Tips
Here are some tips on how to keep a healthy credit score.
Control of your Credit Utilization ratio
The credit utilization ratio is a measure of your credit usage against the given credit limit. By limiting your credit utilization to 30%, you can build a good credit score over time. In case, your credit card usage exceeds the 30 per cent limit then you must make the repayment before the billing cycle. That way your credit score won’t be impacted even if you make high end purchase using your credit card. You can use a quick loan through a loan app to make this repayment.
Have a diversified credit portfolio
Before approving your personal loan request or credit card request, lenders check your credit portfolio. With a diversified credit portfolio, you get a positive remark on your credit report. In all, try to have a good credit mix (including credit cards, secured loans, and unsecured loans) to maintain a good credit score. Also, make sure to not overburden yourself with multiple loans at once. Having too many loans can also impact your credit score.
Avoid many credit applications
Many people make this mistake of applying for too many loans at once. But when you submit a credit application, the lender sends a hard enquiry to your credit bureau. Sending too many hard enquiries through multiple lenders make you seem credit hungry. This impacts your credit score negatively. You must make your financial decisions very carefully after thorough research and study. Compare different loan offers using a loan app and apply with the one that best suits your needs.
Work to have a lengthy credit history
After taking credit for the first time, generating your credit score takes up to 3 to 6 months. In such cases, lenders cannot assess your credit profile because of a short credit history. Hence, it helps to have a lengthy credit history. In the process, lenders can understand your credit behaviour. You can apply for a credit card or avail small ticket loans to build your credit profile. If they perceive you to be a responsible borrower, they will approve your personal loan application within minutes.
Do not pay only the minimum amount due
Almost all credit card companies allow customers to pay 5% to 10% of the total outstanding amount. Even so, if you pay only the minimum amount due every month, then the rest of the balance gets transferred to the next billing cycle. Moreover, you have to pay interest on the remaining balance. Now, if you do not want interest to accrue, always pay your bills in full and not only the minimum amount due. Paying in full and on time is key to maintaining a good credit score.
It’s easy to see that having a good credit score is always beneficial. You never know when a financial emergency can hit you and having a solid credit profile makes it easy for you to avail a loan at the best terms. It makes you an eligible loan customer and gives you the power to negotiate better loan terms.