Have you ever been denied entry onto your favourite ride at the theme park because you surpassed a certain age? It’s unfair, right? Now, think of the same situation but you’re consistently denied credit cards, apartments, and loans. A mysterious number is holding you back from securing the car of your dreams.
But a credit score is more than merely a number. It reflects your financial health and responsibility. A good credit score can open you to a world of vibrant opportunities – from buying a house to securing a car loan with the best interest.
Whether you’re a newbie or boosting your score, it’s time to take control! To help you increase your credit score, this blog will help you simplify the world of credit scores.
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Simplifying Credit Score
Your credit score is a report card for your money management skills. You get a report card to show how well you’re performing in school, similarly, a credit score highlights how well you handle your money.
Credit scores, represented in terms of a number, predict how likely you are to pay loans on time i.e., your ‘creditworthiness’ based on your credit reports, and your payment histories. It is also commonly known as credit rating. The rating or score specifies the terms on which the credit is offered to you.
A good score automatically means that you are a good student who is responsible for your money. When you get a high percentage, your parents gift you a new toy or a bigger room. Alternatively, a bad credit score is equal to bad grades.
This is the strategy companies use.
They use credit scores to determine whether you are a good enough risk to offer auto loans, mortgages, insurance policies, and credit cards. Companies then refrain from lending you money because they are unsure if you can make timely repayments or any repayments at all.
The general process followed is – checking and mapping reports based on your history of repaying borrowed money, the types of loans you applied for, the longest particular line of loan you have had, or the total debt you owe. Then, certain statistical models are used to compile and analyze this data to generate a credit score. The three significant steps involved are data collection, data analysis, and score generation.
Factors that Influence Your Credit Score Change Over A Specific Time
Remember that credit scores are not static. They change over certain periods depending on your financial activity. Some factors that influence the changes in your score:
- Repayment History: The payment frequency, amount due, and credit account type affect your score significantly. Consistent on-time payments positively impact your score, whereas, delayed payments lower it.
- Credit Utilization: Credit utilization pertains to the amount of credit you use compared to the total available credit. It includes a revolving account, such as a credit card, providing you with a steady source of credit that can be used and paid back multiple times.
A high credit utilization ratio lowers your score illustrating how you manage your current debt. When you pay back the credit after using it for purchase, it estimates how likely you are to repay your loans.
- Mix Credits: Mixing of different credit types such as loans, mortgages, credit cards, etc., positively increases your credit score. But, before opening any new credit accounts, remember to occasionally use an open credit account to maintain a healthy mix. Open credit accounts allow you to access funds from the borrower whenever they want based on an initial agreement – you make timely payments to salvage active debts.
- Credit History Length: The stability of your financial profile increases with the increasing longevity of your credit history.
- Credit Inquiries: Multiple credit inquiries made within a short period also hampers your credit score. There are two forms of inquiries – soft and hard. A soft inquiry is conducted by you or a lender to check your report without your knowledge. This goes unnoticed without affecting your credit score.
However, a hard inquiry is when you permit a lender to check your credit report. This stays on record for over two years for other creditors to notice. A single inquiry might not harm your score, but multiple hard inquiries within a short period drop your score by 10 or more points.
How To Improve or Increase Your Credit Score Significantly?
The steps you take to improve your credit score depend on your credit profile. Primarily, understand the factors that influence your credit score. Through simple means, focus on paying outstanding or down balances, timely paying your bills, and avoiding taking on new debt.
Understanding your credit profile helps you build your credit from scratch or rebuild it. Here are some significant steps you can undertake to either improve or increase your credit score over time –
- Make Timely Payments
35% of your credit score is made up of your payment history accounts. It is the most crucial credit score factor. The overall repayments include on-time, late as well as missed payments reported to credit bureaus.
There are variable options for setting up autopay on your UPI or bank accounts, and calendar reminders to make timely payments in this digital age. Pay your bills on time, and it may result in a steady rise in your credit score.
Even when your payment is a few weeks late, it shows on your credit report for the next seven years hurting your credit scores. But, if you continue to stay consistent with your payments after a single instance, the negative effect will diminish.
- Downpayment on Your Revolving Accounts
Significant advisors believe that the credit utilization ratio should remain below 30%. While this might not be set in stone, keep it as low as possible. Do so by paying off the highest credit card balances. Also consider a balance transfer credit card, debt consolidation loan, debt management plan, or a debt avalanche repayment strategy to pay down your credit card debt.
Suppose your debts are a stack of pancakes. The debt avalanche strategy is first eating the thicket pancake to digest it quickly. The thickest pancake is the debt with the highest interest rate. By paying off this debt first, you reduce the interest and save money in the long run. Then, you move on to the second thickest pancake (debt) until you clear the plate.
- Be an Authorized User
When you rebuild your credit score, ask a close family member to add you as an authorized user on their credit card account. An authorized user is added to a credit card account by the primary cardholder and enables you to make purchases using the card without any additional responsibility to pay additional charges.
If the credit card is managed well, it will positively change your score. The account should have a positive repayment history and a low credit utilization ratio. Once this step is undertaken, the credit card company will report the entire history of that account to the credit reporting agencies within the next two months.
- Avoid Closing Your Oldest Accounts
Think carefully before closing any credit card accounts as well. Different credit cards are like subjects in college. Each subject contributes significantly to your overall (credit) score. However, dropping a subject you’re securing high numbers in, may affect the aggregate at the end of the semester.
Similarly, closing a credit card with a low credit utilization will lower your credit score. Opening new accounts quickly can have a significant impact. Missed payments in this account may have a negative influence, but you can wait for them to fall off the credit report as discussed in the first point.
On the other hand, if the subject was one you failed, just as a credit card with a high interest rate, closing it may improve your credit report in the longer haul.
Hence, we recommend using your oldest credit card every few months or enabling a tiny recurring bill to keep the credit card active.
- Diversify Your Credits
This is similar to mixing credits. Different types of credit such as mortgage loans, auto loans, or multiple credit cards give you a stronger credit mix than someone with just one loan. Your score will gradually rise as you responsibly finalize one loan only after another, and have a history of mixed credits. This ensures low credit utilization and a positive history of completed payments. Additionally, undertaking EMI for a longer duration also lessens your repayment load per month.
- Limit Credit Inquiries
Each hard inquiry knocks 5-10 points off your overall credit score. Multiple inquiries can reduce your score in one go and stay on your report for two years. Hence, apply for credit only when you can avoid hard inquiry. Check the prequalifications for a loan or credit card and if they entail a soft credit check that doesn’t affect your credit score.
This is similar to questioning the legibility of an action. When you ask too many questions or are insistent with your doubts, those around you also start to have doubts.
- Rectify Inaccurate Information
Check your credit report information for inaccuracies to avoid any negative impact on your credit score. This is true in the case of identity theft as well where fraudulent accounts may derogatory influence your report.
You may rightfully dispute this incorrect information by talking to the credit agencies. Regularly reviewing your reports and finding unrecognizable details will help initiate an investigation into rectifying such misinformation. Most of these are resolved within a month. In case of a valid dispute, the credit reporting agencies remove the incorrect details.
Conclusion
Improving your credit score requires a long journey filled with patience, discipline, and understanding of your financial activities. You don’t sprint towards your financial goals. Make on-time payments, reduce credit card debt, and monitor your credit report. Enhance your creditworthiness. Do you wish to take control of your financial future? With an in-depth understanding of the basics, watch your credit score soar!
To learn more regarding this, you can access more information through RBI-licensed credit information companies in India such as Equifax, Highmark, Credit Information Bureau India Limited (CIBIL), and Experian.
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