Lenders use credit score as one of the first filters for evaluating loan and credit card applications. Several lenders have also started using credit score to set the risk-based interest rates for their loan applicants. Its rising importance in our financial lives makes it essential for all to work towards building a strong credit score.
Adopting these 5 financial habits can help you build a strong credit score:
1. Repay your credit card bills and loan EMIs by the due date
Lenders usually prefer lending to loan applicants having disciplined repayment behaviour. Credit bureaus too are widely believed to give maximum weightage to loan and credit card repayment history while computing credit score. This makes it imperative to ensure timely repayment of your loan EMIs and credit card bills. Failing to do so will reduce your credit score, which in turn may reduce your future loan and credit card eligibility.
2. Restrict your credit utilization ratio within 30 percent
Credit Utilization Ratio (CUR) refers to the ratio of total credit limit utilized by you. Lenders usually consider credit utilization ratios of over 30 percent as a sign of credit hunger. Hence, credit bureaus reduce your score on breaching the 30 percent mark.
If your credit card spends frequently exceed this limit, request your card issuer(s) to increase your credit limit or opt for an additional credit card.
This would increase your total available credit limit and, thereby, reduce your credit utilization ratio. Make sure you do not increase your credit card spends on obtaining the additional credit limit.
3. Avoid submitting multiple credit enquiries within a short time span
As and when you apply for a loan or credit card, the lender will assess your creditworthiness by fetching your credit report from the credit bureaus. Such credit report requests initiated by the lenders are considered as hard enquiries, each of which drags down your credit score by a few points.
Hence, submitting multiple loan or credit card applications within a short span of time can lead to a significant drop in your credit score.
This can seriously hamper the prospects of getting your loan or credit card approved.
Instead of directly applying for loans or credit cards with multiple lenders and card issuers, visit online financial marketplaces to compare various loan or card offers available on your income, credit score, job profile and other eligible criteria. While these marketplaces also fetch your credit report while offering numerous loan or credit card options, such credit report requests are considered as soft enquiries and are not considered by the credit bureaus for computing your credit score.
4. Review your credit report at regular intervals
Credit bureaus calculate your credit score on the basis of your loan and credit card related activities reported by various lenders and credit card issuers. Hence, any clerical error made by your lender or credit bureau can adversely impact your credit score.
Similarly, any possible fraudulent loan or credit card application or transaction made in your name can also harm your credit score.
The only way to timely spot such discrepancies is to fetch your credit report at periodic intervals, ideally at least once in three months. This would allow you to detect misinformation or clerical errors, if any, in your credit report and have them rectified by the lender or the concerned bureaus at the earliest.
As credit bureaus allow consumers to fetch one free credit report every year, you should spread your free credit report requests from each of the four different bureaus across the year in such a way that you avail one free credit report in each of the financial quarters. Alternatively, you can visit online financial marketplaces to fetch your free credit reports along with their free monthly updates.
5. Do not forget to track repayment activities of co-signed/guaranteed loan accounts
Stepping in as a co-signor or guarantor for a loan makes you equally liable for ensuring its timely and regular repayments. Hence, any delay or default in the repayment of a co-signed or guaranteed loan account will adversely impact the credit score of the co-signor/guarantor. This makes it important to review the repayment activities of co-signed /guaranteed loan account(s) at periodic intervals. As the repayment activities of the guaranteed or co-signed loans are also included in your credit report, regularly reviewing your report can help you in tracking the loans guaranteed or co-signed by you.
Radhika Binani is Chief Product officer at Paisabazaar.com, with nearly 18 years of extensive experience across financial services, consumer banking and FMCG. At Paisabazaar.com, she spearheads the consumer-focused product innovation platform and is responsible for making a world-class credit score platform that gives consumers access to free credit reports.