A credit score is how a bank or financial institution measures your creditworthiness before giving you a loan or any other credit facility. As a young investor starting on your financial journey, you must have a healthy credit score. This is because a decent score can help you get the loan quickly and at superior terms and conditions. This article explains some simple tips on how young investors can improve their credit score.
# 1: Check your credit report regularly
As per the regulatory framework in India, banks have to check the person’s credit score before giving them the loan. A regular check of your credit report can help you find out your latest score at a given point in time. Banks generally accept a score of above 750 for loan sanction. Checking credit report can help take you corrective steps in case of a low score. Also, sometimes banks make errors in reporting details to these bureaus. Analysis of credit report also helps you find out any inaccurate and outdated information on your report. You can decide to raise an online dispute with the concerned credit report provider in such a case. Also, note that checking your own report does not impact your credit score in any way.
# 2: Convert your high-cost loans to EMI
A high outstanding balance on your credit card reflects poorly on your credit score. Whenever you purchase something costly and feel that it will be challenging to pay the total amount, you can proactively get the amount converted to EMI. This reflects your ability to manage your debt and take proactive steps in moving it to cheaper alternatives. You can also make an inventory of your existing credit card debt and try to consolidate them into one single personal loan with a fixed EMI. This approach can also help you to manage your monthly budget in a better way.
#3: Pay EMI and credit card payments on time
Even if you have delayed your payments in the past, resolve to not miss a single payment due date for all your future payments. Set a reminder to make the payment at multiple places in your home. It may be your phone, PC, a post-it note on your fridge!. In the case of a credit card, take care to pay the total amount and NOT the minimum amount. A much better option is setting up a standing instruction for your loan and credit card payments and even your utility payments. This will also help you avoid the late payment fee and the time taken each time to track and make the manual payment. Also, take care to choose a suitable loan tenure when applying for the loan. This will help keep the EMI amount within manageable limits.
#4: Don’t be in a rush to close loans with a good repayment record
Don’t foreclose a loan if you have a good repayment record and you wish to improve on your credit score. The existence of such a loan in your credit profile improves its credibility and contributes to the overall score. In addition, it shows to the bank that you have the necessary financial capability to pay for the loans. Hence make sure that you continue your loan payments regularly. Continuing the loan also saves you from the hefty pre-payment penalty in the initial years of any loan.
#5: Resist the temptation of credit shopping
Many young investors fall for advertisements for credit card reward points and other freebies and apply to multiple banks and financial institutions. Please note that all these applications are registered as a “hard enquiry” in the credit information database. Your credit score can get impaired if you make frequent hard enquiries across multiple banks simultaneously. A better option is to apply to one bank at a time. You can wait for a month or so and then apply to another bank if your loan gets rejected. Try to draw up a monthly budget and stick to it. Try first to seek financial help from friends and family and keep loans and credit cards the last option.
#6: Pay attention to the credit utilisation ratio:
The extent to which you use the credit facilities at any point in time (known as the credit utilisation ratio) also impacts your credit score. Hence, stay away from the temptation to max out your credit cards. Instead of having one credit card fully maxed out, you can choose to have two cards and have 30-40% outstanding on each card. Do not be in a rush to close credit cards. If you get free of cost credit limit enhancement, go for it. Make sure you put reasonable transaction limits to prevent card misuse in case of a theft/data breach.
#7: Don’t discard your credit card/stop EMI payments
Many people stop the payment of loan EMI or credit card outstanding midway due to any unresolved dispute with the bank. Unfortunately, this causes the bank to report the card/loan as “Settled” or “Written Off” to the credit information company, resulting in near-permanent damage to the credit score. A better approach is to go through the formal grievance redressal process of the bank. For example, suppose the bank does not resolve the issue to your satisfaction. In that case, you can pay the total outstanding amount and close the relationship. While this approach may result in a temporary hit to your ego, it will save your credit report from a long-term negative impact.
Loans and credit cards are the reality of our modern financial system. A good credit score helps in the faster processing of loans and, in some cases, helps in getting loans on better terms and conditions. Disciplined money behaviour can go a long way towards a healthy credit score and the ability to access suitable credit facilities.
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