At a time when education, healthcare and even daily household expenses are rising exponentially, your ability to borrow funds in times of need assumes greater importance. Imagine failing to procure enough funds for your child's education or having to let go of your dream house because your loan was rejected over a poor credit score. Banks and other financial institutions look at various parameters when they evaluate your loan application. There is a scrutiny of basic parameters such as age, income, job profile and place of residence, after which your credit score is checked. While you can't do much about your age, income or job profile, building a good credit score is in your hands. Here's how to do it:
Ensure a healthy credit mix of loans
Credit mix refers to the ratio of your secured and unsecured debt. Usually, lenders prefer those who have a higher share of secured loans such as home loans. Credit bureaus, too, score such borrowers favourably. If you have a high share of unsecured credit such as personal loans, loan against credit card and education loan, you are likely to be a "less preferred borrower" for a financial institution. If you have multiple home loans and are contemplating to pre-pay them, start with unsecured loans. An increased share of secured loans will increase your credit score.
Keep credit utilisation ratio within 30%-40%
This ratio refers to the proportion of the total credit card limit used by you. For example, if your credit limit is Rs3 lakh, of which you have used Rs30,000 this month, your credit utilization ratio for the month will be 10%. As financial institutions prefer to lend to those with credit utilisation ratio of up to 30-40%, credit bureaus reduce your credit score if you breach this level. If you are breach the limit frequently, request for an increase in the credit limit or apply for an additional credit card.
Don't apply for credit from multiple lenders at the same time
Whenever you apply for a loan or a credit card, the lender or card issuer will get your credit report from the bureau. Such lender-initiated requests are referred to as hard enquiries, for which the credit bureau reduces your score by a few points. Too many of these enquiries in a short period of time can be detrimental, as not only will your credit score fall, but you would also be conceived as a credit hungry applicant. Lenders treat such applicants as risky, thus avoiding lending. Chances of getting lower interest rates, too, will be miniscule.
Fetch your credit report at periodic intervals
The first step towards improving your credit is fetching the credit report and reviewing it closely. It tells you where you stand and if you need to take urgent steps to improve your score. It helps detect inaccuracies. I have been a victim of such inaccuracies. A few years ago, I was rejected a home loan by a leading public sector bank. On enquiring, I realized a namesake's credit defaults had been linked to my name because of which my credit score nosedived.
Remember, credit bureaus receive data from your existing lender and credit card issuer on your credit behaviour regularly. As bureaus use this data to calculate your credit score, any discrepancy in reporting by lenders or credit card issuer will impact your credit score. To detect such errors or frauds, check your credit report periodically and report the errors, if any, to the lender or card issuer.
Timely repayment of EMIs, credit card dues
Although bureaus don't disclose the method of calculating credit score, it is widely believed that how you repay the debt gets maximum weightage. Always ensure timely repayment of your equated monthly installments (EMIs) and credit card dues in full for a high credit score. Many people make the mistake of paying only the 'minimum amount due' on credit cards. This not only attracts heavy charges, but also lowers your credit score significantly.
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