What is a Credit Score?
A credit score is like a report card for your financial performance. In other words, it is a measure of your overall financial health and is an essential factor that all financial institutions consider while deciding to approve your loans or other lines of credit. A high credit score helps you secure loans quicker with better terms and competitive interest rates. Let us examine some best practices using which you can ensure keeping a high credit score.
Credit Card Payment History
This is perhaps the most important factor and the majority of the lenders put special emphasis on this while considering your loan application. The simplest way to build a high credit score is by making the bill payments on time.
With our busy lives and daily schedules, it is not uncommon to miss payment due dates. This incurs late fee charges and adversely affects your credit score. Using your smartphone, you can set monthly reminders which will allow you to make your payments on time.
A Online credit card payment is both convenient and ensures the amount is transferred ultra-quick, thus avoiding further delay that can be caused by payment processing. Setting up the auto-debit facility to directly pay your credit card through your bank account is another effective way of avoiding late payment and other delays.
Old Unpaid Credit Cards
Delinquencies and unpaid old credit cards are a big red flag and can severely affect your credit score. Make sure these cards, even if not in use, are completely paid up. You may then go ahead and cancel the card and the associated account.
Check Your Credit Report
It is advisable to check your credit report periodically to identify any errors or miscalculations which can be disputed or questioned by the relevant authorities. Knowing your credit score is an important step in order to improve it. It will also help you identify some old card accounts which may have slipped your mind and have unpaid balances on them.
Credit Utilization
Another important aspect considered for a credit score is credit usage. This basically means what percentage of the credit limit is being used. Most experts advise that your outstanding due should not be over 30-35% of your credit limit.
The simplest way of achieving this is by ensuring timely payment of the full amount which is due so that your credit limit counter is reset. You may also seek to raise your credit limit to have a larger denominator for utilization calculation. Several people wonder “what is the unbilled amount in credit cards” and what is its importance. Now you know; it is an indicator of your overall card usage along with the previously billed outstanding balance.
Healthy Credit Mix
Just like in the case of credit cards, other types of loans and lines of credit are also monitored in your individual credit score tagged to your PAN card. A combination of credit cards, unsecured loans and loans against collateral deem you to have a healthy credit mix. This makes your application more appealing to the lenders who deem you to be a low-risk debtor.
Build a High Credit Score and Secure Your Financial Future
Credit scores are of paramount importance to loan seekers and also for lending organizations. Whether for a bank or an NBFC (non-banking financial company), a high credit score makes you a lower risk customer who is unlikely to default on their repayments.
This, in turn, allows you to get better limits, flexible repayment terms and more competitive interest rates. The credit score is made up of a collection of factors with different weightage associated with them. The leading credit information companies like CIBIL and Experian are entrusted to track and manage the credit score of individuals based on their payment history, the number of loans and/or credit cards registered in your name, any payment defaults or late payments etc.