10 ways to improve your Credit Score

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.

How to get your credit report online – in minutes

cibil-logoYesterday we saw how your credit score and credit report is important if you want to apply for a loan or credit card in the future. It is very easy to get your credit score by applying online and it costs just Rs.470. In fact it is recommended that you regularly check your credit report at least once a year.

1. Fill the online form

Go to the CIBIL application form page and fill it up. It just asks for basic details like your name, address, phone numbers. You also need to have one Identity proof and one Address proof. Could be your PAN card, passport number, Driver’s license, Voter ID, Telephone Bill, Bank statement, etc.

The last part is your Loan account number. If you have a credit card, you need to fill it with your credit card number. You can fill in a maximum of 2 account numbers. This is used to search for your particular information from the CIBIL records.

2. Online payment

Once your have filled the form, click to button at the bottom of the page to be taken to the online payment page. You will be redirected to a online payment gateway and be charged for Rs.470. After payment, you will be redirected back to the CIBIL page and make sure you note down any identification ID or reference numbers you find on this page.

3(a). Authentication

This is where CIBIL asks a few questions about your loans or credit cards. Just simple 3-5 questions where you need to choose the right one from multiple options. Eg: the bank providing the credit card, loan provider, etc. There shouldn’t be any problem with this step unless you have amnesia about any money you borrow.

Once you have answered this, you will be redirected to the final page which will have your credit score and the credit report which you can download. When I tried to get my report two months back (May 2013) the page just had a spinner wheel and didn’t load. But using my awesome HTML skills (just look at the URL of the final page) I found out my credit score. And almost immediately I received an email with the credit report in a PDF file (password protected zip file). The instructions for the password are available in the email.

3(b). Authentication not successful

If for some reason the authentication isn’t successful, you don’t have to worry and you don’t have to pay again. You just have to authenticate it via snail mail. You just have to send the payment receipt, self-attested photocopies of the Identity proof and address proof and mail it to CIBIL. You will get back the report in a few days.

4) Verify your credit report

It isn’t just enough if you see your CIBIL score. You need to read through the credit report and check if all the information present in it are right. It lists all the loan or credit card account you have, your payment history (upto 36 months), status of the account, enquiries that any bank makes about your credit report, etc.

Read through each section carefully and if you find anything fishy or wrong, take it up with your bank and ask them to send the right information to CIBIL. If your history is correct and your credit score is still bad, there are a few ways to improve your score. It is a gradual process (may take a few years) but it is important you have a good score. I will write up a post in the future on tips to improve your credit score.

Simple isn’t it. Make sure you go ahead and get your credit score today and check if everything is right.

Why you should repay your loans regularly

Most of us would have taken loans at some point in our life. Either an education loan for paying your college or a loan for your vehicle or you would have bought your dream home. Other popular form of debt is credit card.

Whichever method you borrow money from a bank or a financial institution, do make sure that you repay it regularly and and start at the earliest.

First reason is simple, every month you miss your regular payments, the amount you end up paying would begin increasing. Money always grows exponentially – especially if owe it to others. And the penalty you pay for late payments also eat into your savings.

Second reason is something that is even more important – your credit score. Your credit score is basically a number from 300 to 900 given by an organization called CIBIL. Whenever you apply for a loan or credit card your bank asks CIBIL for your credit score and credit report. And all banks/financial institution sends a report of your loan repayment regularly – so your score is updated frequently.

If your credit report is good, you get your loan and at better terms. If your credit report is bad, you may get need to pay higher interest rates and worse your loan application may even be rejected.

CIBIL calculates the credit score based on 5 important parameters and each parameter has got its own weightage:

  1. Type of credit used – 10%
  2. Recent search for credit – 10%
  3. Length of credit history – 15%
  4. Credit Utilization – 30%
  5. Payment history – 35%

If you see the last parameter, you can see that your payment history has the most weightage. Which means, every time you miss out on the monthly payments, your score falls significantly.

The reason for this is plain logical. Lets say you have two friends Alice and Bob who both have borrowed Rs.10000 from you. Alice returned the money in 5 installments of Rs.2000 each without any default. Bob on the other hand returned Rs.2000 only for the first month and paid the remaining installments only after a year. If they both come and ask for money again, Who would you give your money? Naturally Alice – because you don’t want to take the risk again. Banks are similar and they don’t want to risk their money by lending to someone who are prone to defaulting on their repayments.

And this means, repayment of all kinds of credit you have utilized. It could be the monthly EMIs you pay for your car/house loan as well as the monthly credit card bill. Lot of people pay just the minimum balance on their credit card bill. That is a very bad, bad thing to do. Credit cards have a very high interest rate than your traditional loans. 

So make sure you have a plan to repay all your loans as regularly as possible and if you can even decrease your expenses so you have extra cash to pay a little bit extra. This is the first step which you must take to fix your financial life.

You may ask is it possible to know what your credit score is? The banks get it, why can’t we? Tomorrow we will see how to apply for and get your credit score within a few minutes.