After getting your credit score from CIBIL, if you got a good score (anything above 750 is good, above 800 is better) then great. If you have a lower score and if its not because of some mistake on the bank’s part, then you can do improve it by following these 10 simple points. Eventually within a couple of years your score would improve. Better credit score means reduced risk of getting your future loan applications rejected.
1. Never miss payments or pay late
As we saw earlier, payment history has a weightage of 35% on your credit score. So make sure you don’t miss your loan payments. Many of my friends just pay the minimum balance of their credit card every month, thinking they can pay it off later. But it is a very, very bad idea as you will be paying a huge penalty – both in terms of money and credit score.
Make sure you setup automatic payments of your home loans, car loans, personal loans and credit card bills so you wouldn’t forget a month’s payment. Make use of technology and pay your bills through online if possible. If you have to use cheques, make sure you issue the cheque a few days before the payment date.
2. Don’t have many credit cards
Having many credit cards isn’t something to be proud of. The more credit cards or loan you have, the more credit hungry you are in the eyes of the lenders. They would be very careful to approve your loan application. Also more number of credit cards you have, harder it is to keep track of it.
If you have more than 2 credit cards, increase the credit limit of two good cards (with the most features, benefits and lowest fees) and close the other card accounts. But be sure to not close them down tomorrow. Close them down gradually – don’t use these cards for a few months and then call your bank and close the account.
Closing all your credit cards immediately can also be a negative. Having few cards which aren’t used for a long time means, you can handle your finances without any external help/money which is a good thing if someone needs to lend money.
3. Keep your balances low
Make sure you don’t use up the entire credit limit of your card. If you have a credit limit of Rs.1,00,000 and if you use up Rs.90,000 every month, it means your credit utilization is at 90%. Higher the credit utilization, lower your score – because if the eyes of a lender you are not having enough money to buy using your cash and instead you resort to using a credit card. Mostly try to use your debit card for daily expenses. I use my credit card only for some big purchases like electronics or payments on international sites.
Also the usage on number of credit cards also play an important role. Lets say you have two credit cards both with a credit limit of Rs.1,00,000. You use up Rs.90,000 on the first card and don’t use the second card at all. Which means your credit utilization is 90% and 0%. Instead spread your utilization across to the two cards. Spend Rs.45,000 on both the cards and your credit utilization drops to 45% instead of the 90%.
4. Maintain a healthy mix of credit
If you have just a few credit cards, then it would be hard to have a good score. Instead have multiple types of credits – like home loans, car loans, personal loans, education loans along with a few credit cards. Of course, credit cards are the easiest way to start improving your credit score when you are starting. But do make sure you have other types of loans too. Which brings us to the next topic.
5. Lower your unsecured credit
Credit can be classified into secured credit and unsecured credit. Any money which is borrowed without any collateral and which you can run away with tomorrow is unsecured credit – eg: credit cards, personal loans. And money which has collateral or is secured with another asset is secured credit – eg: home loan, car loan, education loan, etc.
Having a higher percentage of secured credit means you won’t run away with the money. You can run away without paying your home loan, but the bank can sell off your house and get back their money. Try to have a higher percentage of secured credit than unsecured credit. You look safer in the eyes of the banker.
6. Don’t apply for lot of loans
Every time you apply for a loan or credit card, the bank/lender queries the CIBIL database for your records and this query is recorded. The more queries banks make for your records, the more loan/credit you are applying for. Which means you are a high risk applicant. The way to get more credit (money) is to act as if you don’t need the money. It works for everything in life – girls, money from banks, money from VCs, a new job.
And please don’t apply for loans if you don’t need it. Lot of banks make it pretty easy to apply for a “pre-approved loan” whenever you use an ATM. Don’t apply for all loans you could get your hands on, unless you need them badly.
7. Don’t be a guarantor for everyone
Whenever your friends or colleagues apply for a loan, they might ask you to become a guarantor. Choose who you sign for carefully. You don’t want to guarantee for everyone as whenever they default on their loans, you are held responsible and naturally the bank will get the money from you. Also your credit score will take a hit. Also never give your identity/address proofs to anyone as it is easy forge a signature if one is very desperate to get a loan. It is bad being a guarantor for a bad loan, it is worse being a guarantor without even knowing you are one.
8. Monitor your joint accounts
If you have a joint account (loan or credit card) with your spouse, make sure you monitor them monthly. Don’t let a free reign on money matters. If your joint account holder misses a payment or spends too much, your score will go down. Take charge.
9. Longer credit history is better
It is better to have a longer credit history as banks will generally feel safer if they know you have been paying all your loans regularly and closed your previous loans properly. If two friends ask you money and you know the first friend right from school and then second only after you joined the new job three months back, who would you be ready to give money to? Banks also think the same.
10. Never settle your loans/credit cards
Many people when they feel that their debt situation is going out of control, either run away from their house without repaying or settle the account with the bank by paying a small amount.
If you choose to run away your loan is “written off” meaning the bank marks it as a loss, but you credit score takes a major blow. If you choose to “settle” the loan, by agreeing to pay a smaller amount with the bank, then also the bank informs CIBIL that the loan was “settled” and you credit score takes a plunge.
In both cases you can be sure to never get a loan for a long long time. No lender would even touch you with a 10 foot pole.
Instead of these two options, always choose to pay off your debt. Talk with your banker and negotiate a better rate of interest or a longer duration so that your EMIs will be lower. Most bankers would agree as long as you show a genuine effort to repay their money.
The best way to save money is to not spend more money than you earn. It is pretty simple, but not many realise it and end up with huge debt. Make sure you remember these 10 points whenever you take out the credit card at the restaurant or apply for a loan just because you get instant money.
