What is Credit Score:
It is a statistical number based on your credit history, repayment habits and other financial data collected from financial institution by the rating agencies. Your Credit Score is an indicator of your Credit Worthiness. This data is collected by the rating agency based on a key or unique identifier like Permanent Account Number (PAN – issued by the Income Tax Department in India) or SSN in USA. Each rating agency may assign different weight-age to different parameters used to determine it. Generally, it ranges between 300 to 850 points.
With the credit score check, the lender gets an idea about the probability of default by the borrower, in case a loan / credit facility is given to him/her. Higher the Credit Score better are the chances for getting a loan at cheaper rates. Hence it is important for you to check it before applying for a fresh loan or credit. A credit score below 600 is considered poor and generally the financial institutions avoid loans to such individuals. By maintaining financial discipline you can also improve your it easily. The very small things or ignorance can seriously damage your credit worthiness. By paying little attention to these small little things you can improve the credit score and avail cheaper credit facilities.
To improve your credit score, you should follow certain dos and don’ts.
1. Never delay the payment of installments due on existing loans.
2. Make credit card bills payment always in time. If possible, use the ECS or Auto debit facility on your card bills payment, so that there is no chance of forgetting the bill payment on due date.
3. If possible, try to prepay the existing loans. Making a little extra payment over and above the due EMI or installments not only helps you reduce the interest out-go but also helps improve your credit score.
4. Maintaining good and long banking relations with existing banker helps you increase the credit score. Frequently changing your banker, especially the business related credit facilities, can bring it down.
5. Also make payment of your utility bills like electricity, mobile, insurance premium, municipal taxes etc in time. Though these don’t get reported directly for the credit score check, but these help you maintain financial disciplined life.
1. Do not take different loans from different banks. Try to use maximum credit facilities from one or two banks. For example you have two housing loans, two car loans and one personal loan each of this from a different bank. This kind of arrangement will pull down your credit score. Try to shift all these five loans to one or max two banks.
2. Do not rotate the credit card balance from one card to another card. Rotating balance from one card to another means, you don’t have means to pay the credit card bills. This seriously damages your credit worthiness.
3. Do not fully utilize or over utilize the credit card limit. In case you reach above 90% limit regularly, ask the credit card issuer to increase your credit limit.
4. Do not discontinue your old credit cards without any reason or because you have taken a new card. Longer the credit history with regular bill payments, better the credit score.
5. Do not take too many credit cards from different banks. Maintain maximum 3-4 cards with same number of banks. If you use these cards regularly and make on-time payments of the card bills, your card company would be happy to increase your card limit.
6. Do not withdraw cash from CREDIT Cards via an ATM unless it is an extreme emergency. Frequent cash withdrawal from credit card account brings down your credit worthiness, instead use Debit Cards linked to your savings account for cash withdrawals.
Try to obtain your credit score sheet once a year, so that you know where you stand. In case you find any errors in the reported transactions on your sheet, immediately report the same to the concerned financial institution for correction and updating the same with rating agencies, especially when you are planning to take a fresh loan / credit facility.