What is the credit score? It is a statistical number based on your credit history, payment habits, and other financial data collected from the financial institution by rating agencies. Your credit score is an indicator of your credit worthiness. The rating agency collects this data based on a key or a unique identifier such as the permanent account number (PAN, issued by the Income Tax Department in India) or the SSN in the USA. Each rating agency can assign different weighting to the different parameters used to determine it. Generally, it ranges from 300 to 850 points.
With the credit score check, the lender has an idea of the probability of default on the part of the borrower, in case a loan / credit is granted. The higher the credit score, the better the chances of obtaining a loan at lower rates. Therefore, it is important that you verify it before applying for a new loan or credit. A credit score below 600 is considered poor, and financial institutions generally avoid lending to such individuals. By maintaining financial discipline, you can easily improve it too. Too little things or ignorance can seriously hurt your creditworthiness. By paying little attention to these little things, you can improve your credit score and take advantage of cheaper credit facilities.
To improve your credit score, you must follow certain pros and cons.
Behind
1. Never delay paying the installments owed on existing loans.
2. Always pay your credit card bills on time. If possible, use the automatic debit or ECS feature on your card bill payment so there is no chance of forgetting to pay the bill on the due date.
3. If possible, try to prepay existing loans. Making a small extra payment on top of the EMI due or fees not only helps you reduce your interest expense, but it also helps improve your credit score.
4. Maintaining good and long-term banking relationships with your existing banker helps you increase your credit score. Frequently changing bankers, especially business-related lines of credit, can cause you to fail.
5. Also make the payment of your utility bills such as electricity, mobile, insurance premium, municipal taxes, etc. on time. Although these are not directly reported for credit score verification, they help you maintain a disciplined financial life.
Not to do
1. Don’t take different loans from different banks. Try to use the maximum credit facilities of one or two banks. For example, you have two home loans, two car loans, and one personal loan, each from a different bank. This type of arrangement will lower your credit score. Try to move all of these five loans to one or two banks at the most.
2. Do not change your credit card balance from one card to another. Rotating your balance from one card to another means you have no means to pay your credit card bills. This seriously damages your creditworthiness.
3. Do not fully or overuse your credit card limit. In case you regularly exceed the 90% limit, ask the credit card issuer to increase your credit limit.
4. Do not suspend your old credit cards for no reason or because you have taken a new card. The longer the credit history with regular bill payments, the better the credit score.
5. Don’t accept too many credit cards from different banks. Keep a maximum of 3-4 cards with the same number of banks. If you use these cards regularly and make timely payments on your card bills, your card company will be happy to increase your card limit.
6. Do not withdraw cash from CREDIT cards through an ATM unless it is an extreme emergency. Frequent withdrawal of cash from your credit card account reduces your creditworthiness; instead, use debit cards linked to your savings account for cash withdrawals.
Try to get your credit score sheet once a year so you know where you stand. In case you find any errors in the transactions reported on your sheet, immediately inform the corresponding financial institution to correct them and update them with the rating agencies, especially when you are planning to take a new loan / line of credit.
