Your credit score plays a huge role in helping you manage your finances. It’s not just a random number, it’s your financial reputation. Whether you’re planning to start a business, get a loan, or even secure better terms on a credit card, having a solid credit score gives you the upper hand.
In this blog, we will break down what your credit score means and help you increase your credit score. Let’s get started!
Understanding Credit Scores
Your credit score is a 3-digit number ranging from 300 to 900, which tells about your creditworthiness. Credit bureaus like the CIBIL calculate these scores depending on your repayment history, credit utilization, and financial discipline in India.
A score of 750 and above is generally considered excellent. Here’s a quick breakdown:
- 300-499: Poor
- 500-649: Fair
- 650-749: Good
- 750-900: Excellent
Your credit score matters because lenders use this score to decide whether to approve your loan or credit card application. Whether you’re eyeing a loan for a startup or planning to get a new credit card, a higher score can get you lower interest rates and better terms.
A strong credit score can help you:
- Secure loans for starting a business or investing in property.
- Negotiate better terms with lenders.
- Build a strong financial profile for future funding needs.
If you’re an investor or entrepreneur, having a high credit score can even help you attract funding for your ventures.
Tips to Boost Your Credit Score
Here are a few tips you can use to increase your credit score:
1. Pay all the Credit Bills on Time
Your payment history is an important factor that decides your credit score. Set reminders or automate your payments to ensure you never miss deadlines. Late payments, even by a day, can negatively impact your score.
2. Maintain Low Credit Utilization
Don’t max out your credit cards. It’s recommended to use less than 30% of the credit limit you have in total. For example, if your credit card limit is ₹50,000, try not to use more than ₹15,000. Lower utilization is a sign of better financial discipline.
3. Avoid Too Many Credit Applications
Every time you submit a credit application, lenders go ahead with a “hard inquiry.” This inquiry can temporarily lower your credit score. Applying for multiple loans or credit cards in a short time can make you seem credit-hungry. Instead, you should plan your credit needs strategically.
4. Maintain a Healthy Credit Mix
Lenders like to see a variety of credit types in your history. A combination of secured loans (like car loans) and unsecured loans (like credit cards) can positively impact your score. This is because it shows that you’re capable of handling different types of credit effectively.
5. Regularly Check Your Credit Report
Sometimes, errors in your credit report can pull your score down. For example, a closed loan might still appear as unpaid in your history. Reviewing your credit report can help you spot these errors or unauthorized activities. If you find any discrepancies in your credit report, take action immediately.
6. Increase Your Credit Limit
If you’re managing your credit responsibly, you can request your bank to increase your credit limit. A higher limit reduces your credit utilization ratio, which can positively impact your score.
7. Keep Old Credit Accounts Open
Your credit history’s length matters. The longer your credit history is, the better your credit score will be. It doesn’t matter if you’re not using any of your old credit cards, keeping them open can improve the score as it will increase the average age of your credit accounts.
How Long Can It Take to Improve Your Credit Score?
Improving your credit score takes time and consistency. If you’re starting with a low score (below 550), it might take 6 to 12 months of disciplined behavior to see significant improvements. For moderate improvements (700+), you might notice changes in as little as three months.
Make sure that you avoid:
- Ignoring Credit Reports: Don’t assume everything is accurate. Errors are common and need to be disputed immediately.
- Closing Old Credit Cards: While it may seem like a good idea, this can lower the average age of your credit accounts.
- Making Minimum Payments Only: Paying just the minimum due on your credit card can lead to high interest charges, which could affect your financial health over time.
- Co-Signing Loans: When you co-sign a loan, you’re equally responsible for its repayment. If the primary borrower misses payments or defaults, it can negatively impact your credit score. Thus, only co-sign, if you know the co-signer on a very personal level and have a claim in the purchase, be it a home or a car.
Steadily and slowly, you can work on improving your credit score. However, financial discipline is crucial in this matter.
Conclusion
Improving your credit score is all about responsible financial behavior. Start today by paying bills on time, managing your credit wisely, and staying informed about your credit health. With these steps, you’ll be well on your way to a good credit score, opening doors to better financial opportunities.
Building a strong credit score takes time, but with discipline and consistency, you’ll be well on your way to financial freedom over time.
