1. Build your Credit Score
2. Reduce your Current Borrowing / EMI Costs
Two people - Payal and Rajat - approached the bank to get a personal loan. Payal's loan was approved while Rajat had to endure rejection.
Now, the question is, why did one get through while the other's plea was rejected?
That's where credit score plays an important role. If we dive deep, we would get to see that Payal had an excellent credit score, which made everything easier for her. Rajat's credit score, on the other hand, had taken a beating as he missed repaying his bills a few months ago. While Payal was diligent in monitoring her credit score, Rajat hardly paid any heed to it.
Your credit score is more like a report card where instead of letter grades, your financial decisions ends up within a scoring range.
Now, the question is…
A credit score is an all-powerful force in the strange credit world. It helps lenders determine your creditworthiness - how likely you are to repay your debt on time. Good credit is also vital in deciding your odds of approval for a loan at a lower interest rate. A low interest rate can make a notable difference to your savings.
Every time you set a financial goal, your credit score is likely to be a part of that financing picture. However, credit scores are not the only parameters lenders will look for.
The fundamental factors that go into calculating a credit score are:
Payment history, which accounts for 35% of your credit score
Credit utilization, which makes up 30% of your credit score
Credit age is used to calculate 15% of the score
Mix of credit accounts makes up 10% of the score
Recent credit inquiries affect 10% of a credit score
Late and missed payments can sink your credit score as they account for a significant portion of it.
When determining your score, the scoring model focuses on:
if you have recently missed a payment, or were late to pay
how many accounts you were late to pay
how many payments you missed or made late on each account
To inch closer to a good credit score, improve your payment behavior and develop a clean payment history.
Your credit utilization ratio is the amount of credit you use against your total credit limit. So, if your credit limit is Rs 30,000, with a balance of Rs 12,000, your credit utilization ratio is 40%.
Maxing out on your credit limit will raise your credit utilization ratio drastically, which will bring down your credit score likewise. A good credit score requires the credit utilization ratio to be less than 30%.
Your credit age details for how long you have been using credit. To be precise, it's the average age of all accounts on your credit report. To establish a good credit score, you need a minimum of one line of credit on your credit report that is at least six months old.
Account mix states the number of installment accounts and revolving accounts you have.
Installment accounts are loans, such as mortgages, auto loans, or personal loans, with a fixed monthly payment for a specific duration.
Revolving accounts consist of credit cards and lines of credit with an overall credit limit that you can charge against.
A right mix of these accounts can push your credit score forward.
If you apply for way too many lines of credit all at the same time, your credit score might have to endure a hard blow. Such applications result in hard inquiries, which can taint your credit report for up to 7 years. Although hard inquiries only make up 10%, to make the most out of it, try and minimize credit inquiries.
Now, you may have another question.
If you have reviewed your credit report and discovered that it isn't quite where you thought it'd be, then you're not alone. Start by taking control of your financial future by improving your credit score.
Pay bills your on time - Repaying your debt timely will help you build a clean payment history. It will boost your credit score as it has the largest impact of all the factors in your credit score.
Use credit responsibly - Always try to keep your credit card balances below your credit limits, ideally under 30%. Credit utilization ratio has the second-biggest influence on your credit score.
Don't close all your old accounts - Keeping your older accounts open necessarily raises your average credit age. It will help you improve your credit score and bring down your credit utilization rate. Be careful when you cancel credit cards.
Don't apply all at once - Avoid applying for several credit applications within a short time frame. Such applications yield hard inquiries which can cause a small, temporary dip in your score.
Regularly monitor - You must track your credit reports to look for errors in your credit report.
Unfortunately, all of us don't start with a clean slate as far as credit scores are concerned. Thus, to build a good score, it takes time. So, be patient and keep a check on your credit behavior to sustain a good credit score. Not sure when to get started? Why wait? Check your credit score right away!