Wondering how you can improve your credit score? It’s a common worry, and for good reason. Your credit score plays a crucial role in various aspects of your financial life, from securing a credit card to get a home loan. A poor credit score can limit your opportunities and lead to higher interest rates.
Avinash, a bright and ambitious student from a middle-class family in Mumbai, was eager to pursue his dream of studying engineering at a prestigious university. However, his dreams were shattered when he was denied a student loan due to his parents’ low credit score.
Avinash’s parents had always struggled financially, and their credit history had been marred by missed payments and defaults. Despite Avinash’s excellent academic record and potential, lenders were hesitant to offer him a loan due to concerns about his parents’ ability to repay the debt.
Avinash’s experience highlights a common challenge faced by many Indian students. The credit score system, while intended to assess creditworthiness, can also create barriers for students from less privileged backgrounds. In many cases, a student’s creditworthiness is linked to their parents’ financial history, which can be unfair and discriminatory.
In this blog post, we’ll delve into the importance of credit scores and explore seven practical steps you can take to enhance your financial standing. Improve your credit score, that open doors to various opportunities, such as purchasing a home or securing educational loans at competitive interest rates. Let’s get started!
What is a Credit Score?
A credit score represents your creditworthiness. It is a numerical representation of your borrowing history and how likely you are to repay your debts on time. Lenders use credit scores to assess your risk before approving you for a loan or credit card.
Credit Bureaus in India:
Credit bureaus in India play a crucial role in the financial landscape by collecting and maintaining information about individuals’ credit histories. This information is used by lenders to assess creditworthiness and make informed decisions about loan approvals.
Major Credit Bureaus in India:
There are primarily 4 major credit bureaus in India:
TransUnion CIBIL:
- Joint venture: Between TransUnion, a global information and insights company, and CIBIL, a credit information company in India.
- Key role: One of the most widely used credit bureaus in India.
- Services: Provides credit reports and scores to individuals and businesses.
Experian:
- Global presence: A global information services company operating in India.
- Services: Offers credit reports, scores, and risk assessment tools.
- Usage: Widely used by lenders and businesses for credit decision-making.
Equifax:
- Global operations: A global information solutions and human resources company with a presence in India.
- Services: Provides credit reports, scores, and fraud prevention solutions.
- Usage: Used by various industries, including finance, insurance, and telecommunications.
CRIF High Mark:
- Recent entrant: A relatively newer credit bureau in India.
- Services: Offers credit reports, scores, and analytics.
- Growth: Gaining popularity among lenders and businesses.
These credit bureaus play a vital role in India’s financial ecosystem by providing information about individuals’ creditworthiness to lenders, helping them make informed decisions.
What is the Ideal Range?
The ideal credit score range in India is 750-900 for all major credit bureaus, including CIBIL, CRIF, Experian, and Equifax. A score in this range indicates that you have a good credit history and are a low-risk borrower. However, even a score below 750 may not be a deal-breaker, as lenders also consider other factors such as your income, employment history, and debt-to-income ratio.
4 Factors Determining Your Credit Score:
Several factors determine your credit score, including:
- Payment history: This is the most important factor, accounting for 35% of your score. It shows how consistently you have paid your bills on time.
- Credit utilization: This refers to the amount of credit you are using compared to your total credit limit. A high credit utilization ratio can negatively impact your score.
- Credit history length: The longer your credit history, the better. This shows that you have been managing credit responsibly for a longer period.
- Credit mix: Having a mix of different types of credit, such as Secured & unsecured loans, can positively impact your score.
5 Factors That Affect Your Credit Scores:
Several factors can affect your credit score, including:
- Late payments: Missing or late payments on your bills can significantly damage your credit score.
- Defaulting on loans: Failing to repay a loan on time can have a severe negative impact on your credit score.
- Closing credit accounts: Closing credit accounts can shorten your credit history and negatively impact your score.
- Inquiries for new credit: Frequent inquiries for new credit can be seen as a sign of potential financial strain and may negatively impact the score.
- Public records: Negative public records, such as bankruptcies or judgments, can severely damage your credit score.
5 Benefits of Having a Good Credit Score:
There are several benefits to having a good credit score, including:
- Lower interest rates: You may be eligible for lower interest rates on loans you’re your home loan and credit cards.
- Easier loan approvals: You may have a higher chance of getting approved for loans and credit cards.
- Higher credit limits: You may be eligible for higher credit limits on your credit cards.
- Better terms: You may be able to negotiate better terms on loans and credit cards.
- Job offers: In some cases, a good credit score can be a factor in job offers in banks and other financial institutions.
7 ways to Improve Your Credit Score:
There are several ways to improve your credit score, including:
- Pay your EMI’s on time: Make sure to pay your EMIs for loans dues on time to improve your credit score. Set up auto pay every month before the due date so that will allow the credit card provider to collect its dues without a default.
- Pay your credit card bills in full: Use your credit card for purchases you can afford to pay off in full each month before the interest free period ends. Avoid carrying a balance on your credit card from month to month.
- Reduce your credit utilization: Your credit utilization ratio is the amount of credit you’re currently using compared to your total credit limit can improve your credit score. A high ratio can negatively impact your credit score. Try to keep your credit utilization ratio below 30%.
- Keep your credit accounts open: The average age of your credit accounts is a factor considered by credit bureaus. Closing an old account can shorten your average age, which may slightly lower your score. Lenders may view closing an account as a sign of financial instability or difficulty in managing debt. Don’t close credit accounts unless you have to.
- Limit new credit inquiries: Each time a lender checks your credit report, it results in a hard inquiry, which can slightly lower your score. Too many inquiries within a short period can raise concerns for lenders about your creditworthiness.
- Dispute any errors on your credit report: Check your credit report regularly to ensure that there are no errors such as incorrect personal information, inaccurate account balances, or late payments that you didn’t make. If you find any errors on your credit report, dispute them with the credit bureau to improve your credit score.
- Improve your credit score: If you have a limited credit history, then credit cards can be a powerful tool to build your credit score if used responsibly.
Here is how Ravi, a recent graduate, had no credit history and faced difficulty getting a home loan. He started by using a secured credit card responsibly ensuring he paid his bills in full and on time each month. He kept his credit utilization ratio (the amount of credit he used compared to his credit limit) below 30%.
Additionally, he avoided maxing out his card and made sure to keep a balance on it to demonstrate responsible credit management. Over two years, his CIBIL score improved to 750. This allowed him to secure a home loan at a competitive interest rate of 8.5%.
How to Get an Annual Free CIBIL Report:
You can get an annual free CIBIL report by visiting the CIBIL website.
How Many Times to Check Your Credit Score?
There is no limit to the number of times you can check your credit score. However, it is generally recommended to check your credit score once a year.
A good credit score is essential for financial well-being in India. By understanding the factors that determine your credit score and taking steps to improve your credit score, to increase your chances of getting approved for loans and credit cards at lower interest rates. Don’t wait any longer. Schedule a free introductory consultation with one of our financial planning experts today. We’ll work together to build a solid foundation for your financial success.
