10 Ultimate Ways to Improve Your Credit Score
A credit score, often referred to as the CIBIL score in India. You have heard many times that people’s loans were getting rejected just because of the low credit score. And even the positive one—people getting discounts because of a good credit score. And if you don’t know what your credit score is and now you are curious if the bank is showing no credit history of yours, then lets just directly jump to understand what your credit score is, how to start, and how to improve as well.
What is a credit score?
A credit score is a number that shows how likely you are to pay back money you borrow. It is based on your past history of paying bills and loans. The higher your credit score, the more likely banks and lenders are to trust you with loans, credit cards, or mortgages. Scores usually range from 300 to 900 in India, with a higher score being better. And a score above 750 is considered ideal.
What if CIBIL is showing no records of your CIBIL score?
It happens with the first-time user. And it creates the confusion and panic situation among youngsters as they have no credit score.
So don’t worry about it; that means that you haven’t taken any loans or credit cards yet. So you just start building your credit score by purchasing any basic credit card. And in starting, you don’t have many options for credit cards, as you need a good credit score to buy premium cards.
The simple way is to go with the bank in which you have a salary account, as they will offer you a credit card easily.
Why do you need a credit score at all?
Right, this comes to mind as well.
You need a good credit score because, at some point in life, when you want to buy a car or house, you will prefer a loan. And there, this credit score will help you get the loan with less interest.
Even if some say that they have all cash business and they don’t care about credit score, in India, if you have a lot of cash, then you will invest in real estate, and on buying land, you want to check if the seller doesn’t have any hidden loans on the land.
The best way to check that is to buy that land with a small amount of loan, and if you have a good credit score, you can take a loan on lower interest and lend your money on higher interest in the market.
Here are a few reasons why maintaining a high credit score is crucial:
- Easy Loan Approvals: A high score makes it easier to get approval for personal, car, and home loans.
- Lower Interest Rates: Borrowers with excellent scores often enjoy lower interest rates, saving substantial amounts over time.
- Better Credit Card Offers: You become eligible for premium credit cards with attractive benefits.
- Favorable Loan Terms: Lenders may offer flexible repayment options or higher loan limits.
Factors Influencing Credit Score in India
Several factors determine your CIBIL score:
- Repayment History (35%): The most crucial factor is how consistently you repay your debts, including loans and credit cards.
- Credit Utilization (30%): The ratio of your used credit to available credit affects your score. Lower utilization is better.
- Length of Credit History (15%): A longer credit history indicates responsible long-term credit management.
- Credit Mix (10%): A balanced mix of secured (home, auto loans) and unsecured credit (personal loans, credit cards) is favourable.
- New Credit Inquiries (10%): Each time you apply for credit, your score takes a slight hit. Too many applications within a short time can damage your score.
10 Ultimate Ways to Improve Your Credit Score in India
- Check Your Credit Report Regularly
Your credit score is calculated based on the data in your credit report. Mistakes, such as incorrect information or wrongfully reported late payments, can hurt your score.
Tip: Select only one platform to choose the credit score. I like the One Score app.
Action Step: Obtain your credit report from CIBIL or other credit rating agencies at least once a year. If you spot any errors, raise a dispute with the bureau to get them corrected.
- Pay Credit Card Bills and Loan EMIs on Time
Your repayment history is the most significant factor affecting your score. Any missed or delayed payment will hurt your credit score.
Tip: You can use the autopay option to make your EMI and credit card payments.
Action Step: Always pay your credit card bills and loan EMIs before the due date.
- Keep Your Credit Utilization Ratio Low
Your credit utilization ratio is the percentage of your credit card limit that you use. A high utilization ratio (over 30%) signals lenders that you might be financially overextended.
Tip: If your credit limit is Rs. 1,00,000, then don’t spend beyond Rs. 30,000 as it will impact negatively.
Action Step: Aim to keep your credit utilization below 30% of your total credit limit. If you find it hard to manage, ask your bank to increase your credit limit or use multiple cards to distribute the spending.
- Maintain a Healthy Mix of Credit
A balanced mix of secured (like home loans) and unsecured loans (like credit cards) reflects responsible credit behaviour.
Tip: Try to mix up the loans; take smaller loans even without a credit card if needed.
Action Step: Don’t rely solely on credit cards. If feasible, add a secured loan to your portfolio to maintain a healthy credit mix.
- Avoid Multiple Credit Inquiries
Every time you apply for a new credit card or loan, the lender conducts a hard inquiry on your credit report, temporarily lowering your score.
Tip: Don’t apply to credit cards. frequently only apply to credit cards or loans that you actually want.
Action Step: Limit your loan or credit card applications. When shopping for the best interest rates, use pre-approved offers or soft inquiries, which don’t affect your score.
- Pay Off Debts Instead of Transferring Them
Consolidating your debts might seem like a good idea, but repeatedly transferring balances can hurt your credit score.
Tips: Don’t pay your loans and credit card bills with another credit. It can not only affect your credit score but can also put you in a debt trap.
Action Step: Focus on paying off your debt gradually rather than transferring it to new credit cards or loans. This shows financial responsibility and boosts your score.
- Don’t Close Old Credit Accounts
The length of your credit history is essential for a good score. Closing old accounts, especially ones in good standing, can shorten your credit history and lower your score.
Tip: Don’t take too many credit cards frequently in the first steps, especially those that have annual fees and maintenance charges. Try not to close any credit cards, or also don’t lose your credit card.
Action Step: Keep older credit cards or accounts open, even if you don’t use them frequently, as long as they don’t have high fees. This helps maintain a lengthy credit history.
- Pay Credit Card Bills in Full
Partial payments or carrying a balance might avoid penalties but can still hurt your score. Paying the full amount shows responsible credit behaviour.
Tip: Never fall for the “minimum amount” to be paid scheme; it is nothing but an invitation to the debt trap.
Action Step: Make it a priority to pay off your credit card bills in full each month to avoid interest charges and maintain a healthy credit score.
- Use Your Credit Cards Responsibly
Inactive credit cards might be closed by the issuer, affecting your score. Use your cards periodically to keep them active.
Tip: Try to pay your electricity or gas bill with your credit cards, as you can pay them instantly and it will keep your cards active.
Action Step: Use each of your credit cards at least once every few months, even if it’s for a small purchase, to keep them active and maintain your credit score.
- Negotiate with lenders in Case of Financial Hardships
If you’re struggling to make payments due to financial difficulties, it’s always better to communicate with your lender rather than miss payments.
Tip: It happens with most people during pandemics, so just call your bank if you are about to miss the EMI or payment, and they will plan some relief for you if it is once in a while.
Action Step: Always be proactive in reaching out to your lender if you’re facing financial hardships. They may offer temporary relief options that won’t severely impact your credit score.
Common Credit Score Myths in India
While improving your credit score is essential, it’s also important to avoid falling for common myths that could lead you astray. Let’s debunk a few:
Here are the revised statements without any bold formatting:
- Checking your credit score frequently will lower it.
Reality: Checking your own credit score is considered a “soft inquiry” and doesn’t impact your score.
- You must carry a balance to improve your credit score.
Reality: Paying off your credit card in full each month is better for your score.
- Having multiple credit cards will hurt your score.
Reality: Proper management of multiple credit cards can help you improve your score by lowering your credit utilization ratio.
- Settling a loan will improve your credit score.
Reality: Settling a loan for less than the owed amount might reduce your score, as it indicates you didn’t pay the full amount.
Final Thoughts
Improving your credit score in India requires patience, consistent effort, and responsible financial habits. By following these tips, you can build and maintain a strong score that will benefit your financial life in the long run. From keeping an eye on your credit report to making timely payments, each step contributes to a healthier financial profile.
In the end, a good credit score is not just a number; it’s your passport to financial security and access to favourable lending terms. Start today, and with disciplined financial behaviour, you’ll see positive results over time.