Anybody who’s tried to secure a home loan in recent years might know what a hassle it can be. But there is one thing that can drastically alter your situation for the better – your credit score. In this article, we look at what a credit score is, why it’s important for your financial health, and how you can improve your credit score.
What is a Credit Score?
A credit score basically helps a lender see the credit worthiness of a borrower. Based on the credit score of the borrower, the lender can choose to accept the loan application or reject it. In India, the Credit Information Bureau India Ltd. (CIBIL) monitors your credit history. It then calculates your credit score based on the credit payments you’ve made over a period of time.
CIBIL uses advanced analytics to calculate your credit score, and it is finally computed as a three digit number. The credit score can range from 300 to 900 based on your credit history. If your score is closer to 900, lending institutions are more likely to grant you the loan.
Why is Your Credit Score Important?
Your credit score is an accurate indicator of your financial and credit health. So, more and more financial institutions are relying on this score to give them a better understanding on whether or not you are suitable candidate for a loan. When it comes to applying for a loan, your credit score is as important a deciding factor as your current income and employment status.
According to financial analysts, most banks follow a credit score threshold of 750. Should your credit score fall below that threshold, the lending institution will quite possibly deny your loan application. It is recommended that you check your own credit score, so you can see what potential lenders see.
How Can You Improve Your Credit Score?
A poor credit history will reflect very badly on your credit score. If you want to improve your credit score, financial discipline is a must. And this has to be complimented by regular repayments of your loan and credit card EMIs. Over time, your consistent efforts will bear fruit and improve your credit health.
Here are 9 simple ways you can improve your credit score:
- Avoid late payments and defaulting on existing dues. This will cause potential lenders to doubt your ability to repay your debts.
- Do not use too much of your credit card limit. Ideally, you should not be using more than 30% of your credit limit. If your credit card dues are on the higher side, it is an indicator that you are not capable of handling your dues.
- Try to reduce your unsecured loans (personal loans, credit card loans, gold loans, etc.), and opt for secured loans (home loans, auto loans, etc). Unsecured loans have a higher rate of interest, and the repayment amount adds up over time.
- Make sure you have enough balance in your bank account before you pay by cheque. Bounced cheques are an indicator of very poor financial health. Consistently overdrawing your account will reflect very badly on the books.
- Do not take a personal loan or gold loan to pay off a home loan EMI. This proves that you do not have sufficient income to make your monthly payments.
- Monitor your joint accounts and loans you have signed as guarantor, to make sure they are on track. Any defaults on them will indirectly affect your credit health.
- Do not be credit hungry. If you have just been granted a loan, wait for a while (at least a year) before applying for another loan. If you try to get too many loans within a short period of time, lenders will start viewing your applications with critical eyes.
- Maintain your debt – income ratio. You can utilize a maximum of 40% of your monthly income to pay off your debts and not more. That will give you more wiggle room to pay the dues on new loans you may be applying for.
- Review your credit score frequently to keep track of your credit health. Be on the watch for any red flags, so you can take appropriate measures to rectify it.
If you are serious about maintaining good financial health, find out what credit score is, and take proactive steps to keep it on the higher side. It will make a whole lot of difference for the future of your investment portfolio.