Naveen Kukreja
PaisaBazaar.com
Credit scores play an important role in one's financial life. Based on your financial track record, credit bureaus score you on a scale of 300 to 900. This score determines your creditworthiness for a future loan or a credit card. It is one of the major factors based on which banks and financial institutions decide whether to approve your loans and at what interest rate. Nowadays, employers are increasingly using credit scores as part of background checks before hiring candidates.
If you score 750 or above, chances of your loans getting approved are high. However, anything below 750 means either your loan or credit card applications will be rejected or you will have to avail them at a higher interest rate. If your score happens to be low, you can rebuild it by following these steps:
1.Check your credit report for errors: At times, banks or financial institutions fail to update credi t bureaus regarding repayments because of which, credit reports reflect closed loans or paid off dues as currently active. Wrong information can also result from clerical errors on credit bureau's or lender's part and also due to some fraudulent transactions in your name. If you find any wrong information in your credit report, immediately inform the credit bureau and your lender so that they can rectify it.
2.Pay your dues on time: Your payment record plays a major role in your credit report by contributing 30%–35% of the total score. Therefore, it is important to be consistent with your debt repayments. Your timely repayments in future will steadily improve your credit score.
3.Pay off your debt: This is another easy way of improving your credit score. Start with unsecured loans with high interest rate, such as outstanding credit card balance and personal loans. If required, break your bank fixed deposits to pay them off, as retu rns from an FD are much lower than the interest incurred on unsecured loans.
4.Maintain a proper credit mix: Secured loans such as home and business loans are good loans as they are used for asset creation. Timely repayment of these loans improves your credit score. Unsecured loans such as personal loan and credit cards are primarily used for personal consumption needs. Having too many of them reflect poorly on your credit behavior. Minimize unsecured loans in your credit portfolio and replace them with secured ones to improve your credit score.
5.Don't make too many enquiries for loans: Whenever you apply for a loan, a credit enquiry is made by your lender, which is then recorded in your credit report. Having too many enquires within a short span of time shows that you are credit hungry and brings down your credit score. Try to avoid new loan enquiries if you already have a low credit score.
6.Limit your credit usage: Try to limit your credit card transaction within 30%–40% of your credit card limit as excess usage of your credit card limit shows that you are credit-hungry customer. If your spending is about to exceed 30% of your card limit, request your existing credit card issuer to increase your limit or get another card to take care of your increased expenses.
7.Monitor your co-signed, guaranteed and joint accounts: Closely monitor the statements of your co-signed, guaranteed or jointly held accounts, as you are equally liable for missed payments. Negligence on the part of the joint holder or the guaranteed individual can adversely affect your credit score.
