Knowledge & Insights

It is possible to live with bad credit, but it is not always simple or cost-effective. Having a good credit score can help you save money and make your financial life easier. Credit score is crucial in a lot of ways; hence, it is imperative to know how to:

• Maintain a healthy credit score
• Improvise a credit score

Check your credit report regularly

Loans are especially difficult to obtain for people who have no credit history. Even if the loan is approved, the interest rate will be hefty. As a result, having one credit line, such as a credit card, is a reasonable choice for maintaining a credit history.

Here’s why checking credit report regularly is important:

• Examining your credit score and history might help you to better understand your current financial circumstances.
• Checking your credit reports on a regular basis might help you become more aware of what lenders may observe.
• Checking your credit reports can also help you find out if there is any information on your credit report that is incorrect or incomplete.

Availing at least one loan product

If you want to maintain a good credit score, you should take out at least one loan and make timely payments. Borrowing multiple loans at the same time indicates that you are credit-hungry, which lowers your credit score. Hence, to keep your credit score intact, you should opt for at least one loan.

Avoiding late payments

Paying in time is a good habit to get into so that your credit score doesn’t suffer. Also, avoid using your credit cards as much as possible to keep your debt to a minimum.

• Payment history affects much of your credit score. It has the greatest impact on your credit score. To avoid harming your credit score, it is highly recommended that you pay credit card payments, loan EMIs, and other expenses on schedule.
• According to a recent study, even a 30-day delay in bill payments can lower your credit score by 100 points. If you wait any longer, your score will decline even more.
• Delays have a greater impact on your credit score and history if they occur frequently. For up to seven years, the delay is documented in your report.
• Late payments not only hurt your credit score, but they also cost you money in the form of delay payment charges, higher interest rates, and other fees.

Managing a credit mix

Unsecured loans are commonly thought to be the leading cause of a poor credit score. As a result, use a combination of secured and unsecured credit.

What’s a credit mix?

Types of credit accounts you have are referred to as your credit mix.

• Depending on the credit scoring methodology utilised, the influence of a credit mix on your credit ratings varies.
• Lenders and creditors are often interested in how you handled various types of accounts over time.

Simply explained, your credit mix refers to the types of credit accounts you have, such as mortgages, loans, and credit cards. It’s a factor that’s usually taken into account when determining your credit scores, though the weight it receives varies based on the credit scoring model (methods for computing credit scores) employed.

Lenders and creditors, in general, prefer to see that you have a diversified credit mix – that means you’ve been able to appropriately manage several sorts of credit accounts over time.

Credit Utilisation Ratio

Keep an eye on your credit usage ratio as one of the golden principles to follow. It’s the amount of credit you’ve utilized in relation to the credit limit you have available. Experts recommend that you use no more than 30% of your credit limit at any given time.

For example, if your credit card limit is ₹2 lakhs, you should spend about ₹60,000. Your credit score may suffer if you have utilized more than 50% of your credit limit. Lenders will be in wary if you have a lot of credit exposure because it means you’re more likely to default.

Do not close old accounts

Closing old accounts or credit cards is never a good idea because that accounts reflect a long history of debt payments. Before you close any accounts, think about how many you have, how much they cost you, what you use them for, and how they might affect your credit score.

Although canceling an account may save you money in annual fees or lower the chance of fraud on those accounts, closing the wrong accounts can affect your credit score.

Avoid new hard inquiries

You permit the issuer or lender permission to examine your credit report to assess your “creditworthiness” when you apply for a credit card or any other sort of loan (mortgage, vehicle loan etc.).

In other words, your potential lender wants to know if you’ll be able to repay the money you borrowed or not. The better your credit history, the less danger you present, and the more likely you to get approval for that new credit card or loan.

It’s crucial to understand that there are two kinds of credit inquiries. Your FICO (The Fair Isaac Corporation) score is unaffected by soft inquiries such as examining your own credit report. Hard queries, such as applying for a new credit card or a loan, will have an impact on your credit score.

Take advantage of one free credit report every year

The Reserve Bank of India (RBI) has mandated that all credit bureaus in the country give consumers with one free credit report each calendar year since 2017.

The four credit bureaus currently operational in the country are listed below:

• TransUnion CIBIL
• Equifax
• Experian Credit Information Company
• High Mark Credit Information Service

This implies you have the option of obtaining four credit reports per year. You can also sign up to receive your credit reports, which include your credit score, from any of these bureaus.

You may want to focus on boosting your credit now that you know more about the advantages of having good credit. These seven credit-building steps can be useful:

• Keep track of your credit ratings on a regular basis.
• Understand the components of a standard credit score.
• Keep an eye out for any inaccuracies on your credit reports.
• Find out how frequently you should check your credit reports.
• Learn how to prevent the most common credit card blunders.
• Pay your bills on time and keep your credit card balances low.
• Quick credit score repairs should be avoided.

What formula is generally used to calculate a credit score?

While each credit bureau has its unique model for determining credit scores, there are a few unchanging characteristics that all credit bureaus take into account. The following factors are taken into account:

• 35 percent payment history
• 30 percent credit utilisation
• 15 percent of people have a credit history
• 10 percent new credit
• 10 percent credit mix (credit accounts of different types that make up a consumer’s overall credit report)

Requesting a Free Credit Report

Since 2017, the Reserve Bank of India (RBI) has required all credit bureaus in the country to provide consumers with one free credit report every calendar year.

Below are the four credit bureaus currently operating in the country:

• TransUnion CIBIL
• Equifax
• Experian Credit Information Company
• High Mark Credit Information Service

This means you can acquire four credit reports per year. You can also sign up for any of these bureaus to receive your credit reports, which include your credit score.

Living with bad credit is doable, but it is not always simple or economical. Having an excellent credit score can enable you to save money and simplify your financial life. If you’re seeking a reason to keep your good credit, consider the following advantages of having a good credit score.

Low Credit Card and Loan Interest Rates

The interest rate is one of the costs associated with borrowing money, and it is frequently linked to your credit score. You’ll almost always receive the best interest rates and spend reduced finance expenditures on credit card balances and loans if you have a strong credit score. The less interest you spend, the faster you’ll pay off your debt and have more money for other things.

A Better Chance of Getting a Credit Card or Getting a Loan

Borrowers with a low credit history are sometimes hesitant to apply for a new credit card or loan since they have previously been denied. Because lenders analyse other variables such as your income and debt, having a good credit score isn’t a guarantee of acceptance. A strong credit score, on the other hand, boosts your chances of getting new credit. In other words, you can confidently apply for a loan or a credit card.

Increased Bargaining Power

With a strong credit score, you can get a better interest rate on a credit card or a new loan. If you need more negotiating leverage, you can use other appealing offers based on your credit score that you’ve gotten from other organisations. Creditors are unlikely to budge on loan terms if you have a low credit score, and you won’t have any other credit offers or possibilities.

Obtain Higher Limits Approval

Your borrowing power is determined by your salary and credit score. Because you’ve demonstrated that you return your loans on time, banks are more willing to let you borrow more money if you have a strong credit score. With a negative credit score, you may still be approved for some loans, but the amount will be limited.