The importance of credit score is known to all of us. Maintaining a good credit score is advantageous in a multitude of ways, like better chances of getting a loan/credit card approved at favorable terms, improved negotiation power, increased probability of getting higher amounts of loan, etc.
But a credit score does not remain constant all through; it varies depending on your credit behavior. If you are responsible for your credit, then you can expect your credit score to remain high. Or else it goes down, and a poor credit score wouldn't help much when you need a credit card/loan.
We bring you certain important tips to help you maintain a good credit score.
Keep yourself updated on your credit score: You can't be better at something if you know nothing about it. To maintain a good credit score, it is absolutely essential that you know about your credit score. To begin with, you should check your credit score frequently, atleast once in 3-6 months, to know where you stand. If you regularly check your score, there is always time to take corrective action if you have a low score. Also, errors, if any, in your credit score can be spotted and required action be taken to set them right.
Make regular repayments on your EMI’s: One of the important conditions on which loans are approved, is the expectation that they would be repaid on time. Did you know that information about all your repayments is reported by your banks/lenders to the Credit Bureaus, who in turn use this information to arrive at your credit score? Making repayments on time is one of the cornerstones of good credit behavior. Therefore, it is imperative that you make regular repayments for each of the loans. If you do have some issues, it is good to approach your lender in advance and inform the reason for the delay in repayment. If it is one odd case, your lender will definitely allow an exception.
Pay your credit card outstanding to the full each month: Your credit card issuers send you a statement of your card utilization on a pre-decided date with two figures. One is the minimum amount due and the other, the total amount payable. Many of us make the mistake of assuming that it is good to just pay the minimum amount due and ignore the total amount outstanding. However, the unpaid amount at the end of the pay-by date is not only considered outstanding and reported to the credit bureau but also attracts interest.
Keep an eye on your credit card utilization ratio: Each credit card comes with a credit limit indicating the maximum amount of credit that can be availed. This is arrived at by taking into consideration your income and other factors, like your existing loans, credit score, etc. Just because you have that limit, it is not good to spend the entire amount every billing cycle. Using up your entire credit limit every time is construed as a credit hungry behavior by the credit bureaus and ends up affecting your credit score. If you find yourself spending the entire amount on your credit limit frequently, it may be a good idea to apply for another card and split your expenses between the two, so that credit utilization ratio on both the cards remains low. The maximum recommended credit utilization proportion or ratio is 40%.
Do not apply for credit frequently: Each time you apply for a credit product, i.e. a loan or a credit card, the lender makes an inquiry with the credit bureau about your credit score. This is called a hard inquiry. More the credit you apply for, more the number of hard inquiries on your card. Too many hard inquiries do not bode well for your credit score. Frequently applying for credit is not seen as a credit healthy behavior. In order to maintain a good credit score, apply for credit only when you actually need it, not on each instance when you are offered a card or loan.
Be fully aware when you stand guarantee to someone else's loan: Standing guarantee to someone else's loan is as good as you agreeing to make the payment yourself. If you stand guarantee to borrowings and if they end up defaulting on their payments, you are liable for those payments. In those cases, not only are you putting your financial health in jeopardy, but your credit score is also at stake. So, stand guarantee for only those loans where you are sure of the other person making repayments on time.
Pay attention to your credit mix: Borrowings are categorized under two heads- secured and unsecured borrowings. Credit cards and personal loans fall under the unsecured category while loans like vehicle and home loans fall under the secured category. If you have been applying just for credit cards and personal loans, the same will not be taken in a positive light by the credit bureaus. Such kind of borrowing is perceived to be credit unhealthy and may end up affecting your credit score. So, it is good to keep a judicious mix of secured as well as unsecured products in your credit portfolio.
Take a conscious call on closing old credit accounts: There may arise many situations when you have better offers on new credit cards or loans. This might require you to close older accounts and open new ones. The length of your ongoing credit relationships is also an important factor that decides your credit scores. Longer relations imply that you have been handling the credit product in a responsible manner. So, at times, it may be better to just retain the account (like a credit card) and not use it, than close it.
Pay off any outstanding loans: Any individual borrowing any amount should know that every rupee has to be repaid to the lender with proper interest. There might be some old loans where you just missed paying those last installment(s) and thought your lender might just brush it off. Unless you pay off to the last rupee, your loan accounts are not closed. They will not only be shown as open but will also fall under the defaulting category, which is not good for your credit score. If you are left with outstanding loans, it is good to clear them and get a certificate from your lender that you do not have any outstanding dues/loans
Be Wary of the Debt Settlement option: You might be stuck with loan accounts that you are having problems paying off. In those situations, your lenders may offer you an option to Settle the account. This means that your further repayments may either be reduced or excused. However, debt settlement will end up as a red mark on your credit score and end up pulling it down. If you face such a situation, it is always good to discuss with your lender and request them to lower the installment amount and extend the tenure of the loan. You may end up paying extra interest, but it is better than a low credit score.