5 Ways to Build Your Credit Score

Have you ever been denied a loan or a credit card due to a poor credit score? Or are you planning to apply for a loan in the near future and want to improve your chances of getting approved? Building a good credit score is essential, as it not only helps you get credit when you need it but also at a lower interest rate. 

In India, the average credit score as of FY22 was 715, which is considered a good score. So, let's look into 5 proven ways to boost your credit score!

What is a credit score?

Your creditworthiness, or how likely you are to repay borrowed money on time, can be predicted by a three-digit number known as your credit score. This number serves as a report card for your financial behaviour, and lenders use it to decide whether to approve your loan applications, offer you certain insurance policies, and even set interest rates.

It ranges from 300 to 900, with higher scores indicating better creditworthiness. 
In India, there are 4 major credit bureaus authorised by the Reserve Bank of India (RBI):

1. TransUnion CIBIL
2. Equifax
3. Experian
4. CRIF High Mark

Here's the breakdown of their credit score range:

TransUnion CIBIL

Cibil Range	Rating
300-650	Poor
650-699	Average
700-749	Fair
750-799	Good
800-900	Excellent

Equifax

Equifax Range	Rating
300-579	Poor
580-669	Fair
670-739	Good
740-799	Very Good
800-850	Excellent

Experian

Experian Range	Rating
300-579	Poor
580-669	Fair
670-739	Good
740-799	Very Good
800-850	Excellent

CRIF High Mark

CRIF High Mark Range	Rating
300-549	Low
550-649	Medium
650-749	High
750-900	Excellent

Importance of a good credit score

Having a good credit score is crucial because it affects your ability to borrow money, secure favourable interest rates, and even rent an apartment. Lenders use your credit score to assess your creditworthiness, which measures how likely you are to repay your debts. A higher credit score indicates that you are a responsible borrower, making it easier for you to obtain loans and credit cards on better terms.

Here's why it's so important:

• A good credit score translates to lower interest rates on loans and credit cards. 
• A good credit score increases your chances of getting approved for credit, such as credit cards or mortgages.
• Having a good credit score can lead to higher credit card limits, which is helpful for managing finances and emergencies.
• Your credit score can impact the cost of your insurance. A higher credit score can result in lower premiums.
• Employers may review your credit score during the background check. A high credit score can improve your chances of getting selected for specific job positions.
• Credit scores are commonly used by landlords to screen tenants. A good score can help you secure a better apartment and possibly negotiate lower rent.

Factors that affect your credit score

Several factors can impact your credit score, each with varying weightage in the overall calculation. Here are the key players:

1. Payment History (35%): This holds the most significant weight, making it crucial to consistently make on-time payments for all credit obligations like loans and credit cards. Even a single late payment can significantly dent your score.
2. Amounts Owed (30%): This refers to your credit utilisation ratio, the percentage of your available credit limit you're using. Ideally, keep it below 30% for optimal credit health. High utilisation shows lenders that you rely heavily on credit, potentially increasing your risk profile.
3. Length of Credit History (15%): Having a longer credit history demonstrates responsible borrowing habits over time. The longer your history, the better, even if you haven't used credit extensively.
4. New Credit (10%): Applying for too many new credit lines in a short period can raise red flags for lenders, suggesting potential financial strain. Open new accounts strategically and space them out.
5. Credit Mix (10%): Having a diverse mix of credit types, like instalment loans and revolving credit (credit cards), can be beneficial. However, focus on managing them responsibly, not just diversifying for the sake of it.

5 Ways to Build Your Credit Score

1. Paying Bills on Time
One of the most important things you can do to improve your credit score is to pay your bills on time. Late payments can have a significant negative impact on your credit score, so it's crucial to establish a history of timely payments. Set up automatic payments or reminders to ensure that you never miss a due date. By consistently paying your bills on time, you demonstrate reliability to potential lenders and improve your creditworthiness.

2. Keeping Credit Card Balances Low
This is another effective way to boost your credit score. Your credit utilisation ratio, which is the amount of credit you are currently using compared to your total available credit, is an important factor in determining your creditworthiness. Aim to keep your credit utilisation ratio below 30%. For example, if your total credit limit across all your cards is ₹10,000, try to keep your outstanding balances below ₹3,000. By keeping your balances low, you show responsible credit management and improve your credit score.

3. Building a Diverse Credit Mix
Having a diverse credit mix can also positively impact your credit score. Lenders like to see that you can handle different types of credit responsibly. Aim to have a good mix of credit types, such as credit cards, auto loans, or mortgages. 

4. Limiting New Credit Applications
Applying for new credit can temporarily lower your credit score, as it results in a hard inquiry on your credit report. Hard inquiries occur when a potential lender reviews your credit report as part of the application process. While a single hard inquiry may have a minor impact on your credit score, multiple inquiries within a short period can raise red flags to lenders. It's best to limit new credit applications unless necessary and space them out over time.

5. Regularly check your Credit Report for Errors
This is crucial for maintaining a healthy credit score. Errors in your credit report can negatively impact your credit score, so it's important to address them promptly. 
Review the report carefully for any inaccuracies, such as incorrect personal information, accounts you don't recognise, or late payments that were actually on time. If you find any errors, dispute them with the credit bureau to have them corrected.

Additional Tips for Improving Your Credit Score

In addition to the five strategies mentioned above, here are a few more tips to help you improve your credit score:

• Avoid closing old credit accounts, as they contribute to the length of your credit history.
• Use your credit cards responsibly and avoid maxing them out.
• Consider becoming an authorised user on someone else's credit card, preferably someone with a long and positive credit history.
• If you're struggling with debt, consider seeking professional help from a credit counselling agency.

Conclusion

Building and improving your credit score is a crucial step towards achieving financial stability. By understanding how credit scores are calculated and implementing the strategies outlined in this article, you can take control of your credit score and pave the way towards a brighter financial future. Remember, building a strong credit score takes time and persistence, so be patient and stay committed to your financial goals.