A step-by-step guide to building a strong credit score

Here are ways to make sure your credit score is loan-worthy.

A step-by-step guide to building a strong credit score

A credit score is one of the most important factors that determine whether you qualify for a loan – and the limit of the loan that can be sanctioned for you. Credit is something all of us need once in a while, whether it is to buy a car or a house, or maybe start a new business. Resorting to a loan is often a smart option as we get a lump sum amount at short notice that we can pay off over a comfortable tenure. 

Lenders have their own parameters for disbursing loans to applicants. For this purpose, they ask for various documents and information, based on which they take the decision on whether to approve the loan. In India, the Reserve Bank of India (RBI) has instructed banks to refer to the CIBIL score of an applicant before granting a loan to them. As a result, the CIBIL score, or the credit score, of a person has become instrumental in determining his or her loan eligibility and loan limit. 

Related: Things to Consider Before Picking Up a Credit Card 

Some easy steps to build a strong credit score are given below:

1. Optimise loans and cards – At any given point in time, one shouldn’t have too many active loans and credit cards in your name. These loans and cards appear as a ‘hard enquiry’ against your name, resulting in a diminished credit score. Applying for a new loan immediately after an earlier one has been rejected is not a good idea. Similarly, regularly applying for new credit cards can adversely affect one’s credit score. 

2. Hold on to that credit card – Continuing on the above point, it is better to have fewer credit cards that you have been using for a longer duration. A long-lasting and smooth relationship with a credit card company can do wonders to your credit score. So when the expiry date of a credit card approaches, it is better to renew the card rather than let it lapse and switch to a new card. A credit card ages gracefully, much to the benefit of your credit score.

3. Pay your dues on time – To bring in a Game of Thrones analogy, “a Lannister always pays his debts”. Showbiz catchphrases aside; the bottom line is that to build a healthy credit score it is mandatory to NOT default on bill due dates. If you make sure that you pay all your dues on time for a prolonged period, your credit score is bound to improve. There are financial planning apps that remind you of upcoming bills and even pay them for you without any intervention, so you can rely on these.

Related: Taking a loan against your credit card? Here are some things you must know 

4. Utilise credit wisely – That credit card of yours offers you a credit period, which you should use judiciously. By using credit cards for anything and everything, you could jeopardise the credit limit and hike the utilisation rate unnecessarily. Your credit score will improve if you keep the credit utilisation ratio to 30% or lower. If the current limit seems inadequate, you can try to get the bank to raise the credit limit on your card.

5. Fix errors ASAP – If you notice any mistakes or discrepancies in your credit card bill, you should get it sorted at the earliest with the concerned authorities, which in India is CIBIL. Genuine mistakes can happen at the vendor end in the form of erroneous debits and unjustified charges. You will notice that timely action taken against such errors can do wonders to improve your credit score. 

Related: How to come out of credit card debt 

6. Get rid of old outstanding balances – Credit cards generate bills that indicate the actual amount due and the minimum amount due. If we fail to pay the actual amount due, it remains as an 'outstanding' and reappears on our next bill, this time inflated due to the interest component. Our goal should be to reduce the outstanding amount on our credit card bill as it improves our credit score. As a regular practice, we should use our credit card only to the extent to which we can actually pay it back.

7. Go slow and steady on loans – If you are consistent with your repayment plan, it is better to go slow and steady on loans. Timely repayment of loans can improve credit scores, so it is better not to foreclose or write off loans at one go. Instead, the plan should be to keep the loan on the books and ensure that same is repaid in the coming months in a timely manner.

Related: 5 situations where you should never use a credit card 

These are only some of the practices that can be followed to improve one’s credit score. Most of these are more dependent on discipline rather than financial clout. Thus, with a little effort and focus, anyone can build a strong credit score. 

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