7 ways to improve your credit score

3 days ago, I received an email from my bank and it mentioned that over 79% of loans approved were for those individuals who had a credit score of 750 or above.

What does this mean?

Simply put, it means that if you have a credit score of less than 750, the chances that your loan application for your dream home or the car is likely to get rejected.

Hence, it is in your best interest that you keep your credit score above 750, preferably above 800.  If your have a score less than that, it is important that you improve it.

What is a credit score?

For beginners, here is the definition from CIBIL, the first credit information bureau of India.

A credit score is a 3 digit numeric summary of your credit history. The values range between 300-900. It is derived by using details found in the Accounts and Enquiries section of your Credit Information Report (CIR). It indicates the ‘probability of default’ of a borrower based on credit history.

Read more: How to get your FREE credit score and report from CIBIL?

Why improve your credit score?

I will enlist 3 key reasons:

1. To get a loan approved – You might need to borrow money at various stages of your life. If you do not have a healthy credit history and hence a score, your chances of getting a loan are bleak. A good credit score increases your chances of getting a loan. In fact, when you have a high credit score, the banks will be more than willing to give a loan to you.
2. To get a better deal on your loans – Typically, banks differentiate between good borrowers and bad borrowers. If you have a high credit score, you would be considered a good borrower and this would put you at an advantage. You can use your high score to bargain with banks and get a reduced interest rate compared to what they would offer to someone with a lower score. How much lower rate can you get? That would depend on your negotiation skills.
3. It’s one of your background checks – I was recently preparing an application for a regulatory approval. One of the things that was asked for is my Credit Information Report. That came as quite a surprise to me. My guess is that in all likelihood, if I have a low credit score or a bad credit history, my application might be rejected. You will increasingly see your credit information report and scores being asked for as a background check, such as, while being evaluated for a new job.

So, as you can see, improving your credit score is totally in your best interests. Let’s go for it.

Mission “improve credit score to above 800”

Here are 7 ways to ensure that you increase your credit score to above 800.

1. Pay your EMIs on time – You may have bought your home or car on a loan or even taken a personal loan for a family need, for that matter. Make sure that you pay all your EMIs on time. A good loan repayment history reflects very favourably on your credit score.
2. Don’t revolve credit card payments – When you pay only the minimum amount due on your credit card and let the remaining outstanding amount go to the next bill for repayment, it reflects that you are running tight on money. The other side effect is that you also incur costly interest charges sometimes upto 42% per annum on credit cards. This further increase your loan burden. You should always pay up 100% of your credit card outstanding.
3. Keep credit balances low – Don’t go for many loans. Keep them limited, that is, borrow only as much as you can pay comfortably. Also, if you make a lot of purchases on your credit cards, the outstanding amount will shoot up and that can also have a negative impact on your score and report. Reduce your credit usage.
4. Limit the number of loan applications – When you go around asking for credit with banks, the first thing that they do is to query the credit information database to find out your credit history and score. Each of these enquiries gets recorded in your credit history and indicates that you are hungry for credit. Too many of such enquiries into the database would negatively impact the score. Hence, be careful about making loan enquiries.
5. Have a healthy credit mix – A credit mix is a function of the number of secured loans, which are backed with an asset such as home or car, and unsecured loans, where there is no backing and hence are unsecured such as a personal loan. Keep your unsecured loans less than your secured loans and that would have a positive effect on your score.
6. Avoid becoming a guarantor, as far as possible – To protect their interests, sometimes banks ask for a guarantor for a loan. Now your dearest friend or a family member may request you to become one. But beware. When you become a guarantor you become equally liable for the repayment of the loan. So, if the actual borrower defaults, it will reflect negatively on your credit history too. If you are a guarantor for any loan, make sure that the borrower is making timely repayments.
7. Review your credit history regularly – It will be prudent to review your credit history and information on a regular basis, at least once a year. It will help you identify any negative or false information on your report and get it corrected with the credit information provider. All these corrections of information will help you add to your credit score.

Between you and me: I recently bought my credit report from CIBIL. I was happy to note that it reflected my credit information accurately. Also, my credit score was 763. Not too bad. What is yours?

You can read more details about credit information report and scores at the CIBIL Help Centre.