Understanding Credit Scores and Improving Credit Health

Understanding Credit Scores and Improving Credit Health

Unlock the secrets of improving credit scores and supercharging your financial health!

Money matters can sometimes feel like a puzzle, and one crucial piece of that puzzle is understanding the complex world of credit scores. For most of us, the first time you would have heard of credit was when we got our first job and the bank executive called to ask if you were interested in applying for a credit card. It is only after consistently making credit card payments for several months that we receive our credit report, and that is when we understand what credit score is. 

So, the question for today is, why are credit scores very important? Moreover, how can you take charge of your credit score if it is too low to make it better? 

Let’s find out. 

Firstly, let’s start with the basics and understand credit scores. 

What are Credit Scores?

A credit score is nothing but a financial report card. It is a number that tells lenders how trustworthy you are with money. In India, credit scores range from 300 to 900; the higher your score, the better.

But why should you care about your credit score? Well, because it affects your financial life more than you might think. When you want a loan or a credit card, lenders check your credit score. A higher score often means lower interest rates and better loan deals.

Remember, your credit score also guides your financial decisions. If your score is low, getting a loan for that dream car or house might be tough. But with a good score, you can get loans with reasonable interest rates.

What are the Factors that Affect Your Credit Scores?

Paying Your Bills on Time

Paying your bills on time is essential for maintaining a healthy credit score. Your payment history is a key factor that lenders consider when evaluating your creditworthiness. 

To ensure you maintain a positive payment history, consider setting up reminders or using automatic payment options provided by your bank. Additionally, there are several handy mobile apps available that can help you keep track of your due dates and ensure you never miss a payment. 

Manage Your Credit Utilisation Ratio

Managing your credit utilisation ratio is another critical aspect of maintaining a healthy credit score. This ratio represents the amount of credit you are using compared to your total credit limit, and it is essential to keep it in check. 

As a general guideline, it is recommended to use less than 30% of your available credit limit. This responsible use of credit demonstrates to lenders that you are not overextending yourself financially. Constantly keeping your credit card balances below this threshold shows you can manage your credit responsibly and not rely too heavily on borrowed funds. 

Age Matters

The age of your credit history holds significant importance regarding your credit score in India. A longer credit history often translates to a higher credit score. This is because it provides a more extended period for credit agencies and lenders to assess your financial behaviour and reliability. 

Credit Mix

Your credit mix is the variety of credit accounts you have, such as credit cards, loans, and other mortgages, and it plays a significant role in determining your credit score. This factor reflects your ability to manage different types of credit effectively, which is something lenders often look for. A diverse credit mix demonstrates that you are a responsible borrower capable of handling various credit obligations.

Having debt from multiple sources and consistently making timely repayments showcases your control over your financial commitments. This is a strong indicator to lenders that you are a reliable borrower, making your loan application more appealing and increasing your chances of securing favourable terms in the future.

How Can You Improve Your Credit Score?

1. Understanding Credit Report

Accessing your credit report is not only beneficial but also incredibly easy. You get one free credit report each year from major credit bureaus. 

This credit report is a document that provides a snapshot of your financial history. It includes personal information, details about your employment history, a record of your credit accounts, payment history, credit limits, and loan amounts, among other things.

When reviewing your credit report, it is important to pay close attention to the accuracy of the information presented. One critical detail to check is whether the listed credit limits or original loan amounts are correct. If you find something suspicious where your actual credit limit is higher than what is reported, it is essential to rectify this. 

An inaccurate credit limit could negatively affect your credit utilisation ratio, which, in turn, can impact your credit score.

2. Lower Your Credit Enquiries

Credit or hard inquiries occur each time you apply for credit, such as a loan, credit card, or mortgage. Being mindful of these inquiries is crucial because having too many of them within a short period can negatively impact your credit score.

To maintain a healthy credit score in India, it is wise to be selective about applying for credit. Only apply when you genuinely need it and have a good chance of being approved. Each hard inquiry can stay on your credit report for some time, so it is essential to strike a balance between seeking credit for your financial needs and avoiding unnecessary inquiries that could potentially harm your creditworthiness.

Apart from all the above factors, you must plan to improve your credit score. Start by creating a well-thought-out plan. Always prioritise paying your bills on time, keep your credit card usage well below your limits, and remember to only take credit when needed. By following the above-discussed steps and maintaining responsible credit habits, you can steadily improve your credit score and build a solid foundation for a brighter financial future.

*The article is for information purposes only. This is not an investment advice.

*Disclaimer: https://tejimandi.com/disclaimer

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