Boosting Credit Ratings: Strategies Explained
Maintaining a good credit score is essential for securing loans or credit at favourable terms. Here's a breakdown of the factors that influence your credit score and practical tips for improvement.
Firstly, it's crucial to limit credit inquiries, as multiple hard inquiries can negatively impact your score. The length of your credit history also matters, with longer histories providing more information for lenders to determine your creditworthiness. Keeping old accounts open can help maintain a longer credit history, which is beneficial for improving your credit score.
Your existing credit utilisation, given the highest weightage for calculating your credit score (30%), represents the total percentage of credit you have used out of your total credit limit. It's advisable to keep this below 30%. Diversifying your credit mix, such as having a combination of credit cards, personal loans, car loans, and home loans, can also help build your credit score.
Good credit management is crucial, as it directly influences your ability to obtain a new loan or credit card at favourable terms. Poor credit management may make it difficult for you to avail of any credit. The credit score is calculated based on multiple factors such as your existing credit utilisation, past payment history, credit inquiries, credit history, and your credit mix.
Paying down high credit card balances can boost your credit score within a few months. Making all payments on time is critical since late payments can damage your score for up to a year; consistent on-time payments improve your score over time. Credit reporting agencies update credit reports and scores typically once a month, and changes may reflect within 30 to 45 days after creditors report your updated information.
Correcting errors on your credit report can take 4–6 weeks to reflect and may improve your credit score after that. Severe delinquencies (90-day late payments, collections) can stay on your report for years (up to seven) and require longer time to recover from.
Rebuilding a credit score can take anywhere from 4-12 months, depending on the severity of past credit issues. Regularly checking your credit reports for errors or discrepancies is necessary for maintaining a good credit score.
It's important to note that significant improvement often requires patience and consistent positive actions over several months, with some visible score increases in 1-2 months and more significant gains over 3-6 months as positive information accumulates and negative marks age or get resolved.
Avoiding new credit inquiries, paying bills on time, reducing credit card usage, and checking your credit score regularly every 3-6 months are key to improving your credit score. Paying the minimum due on your credit card bill is not a good idea, as it may lead to higher interest charges and negatively impact your credit score due to increased credit utilization.
Receiving a new credit card may initially lead to a minor dip in your credit score due to the hard inquiry involved, but using it responsibly by paying your dues on time and keeping credit utilisation low will boost your credit score in the future. After loan settlement, it's important to pay current dues on time, convert settled accounts to closed, receive NOC from the lender, and rebuild credit by taking new loans or credit cards and repaying them on time.
A bad credit score (600 or lower) may lead to loan refusal, while a good credit score (750 or higher) is necessary to take out loans or cards. Having a good credit score is not only beneficial for securing loans or credit, but it also demonstrates your financial responsibility, which can lead to better interest rates and terms.
[1] Source: Experian, "How to Improve Your Credit Score," retrieved 2022-03-01. [2] Source: Credit Karma, "How to Improve Your Credit Score," retrieved 2022-03-01. [3] Source: Equifax, "How Often Do Credit Scores Update?" retrieved 2022-03-01. [4] Source: TransUnion, "How Long Does it Take to Improve My Credit Score?" retrieved 2022-03-01. [5] Source: FICO, "Understanding Your FICO Score," retrieved 2022-03-01.
Maintaining a balanced finance portfolio by diversifying your credit mix, such as having a combination of credit cards, personal loans, car loans, and home loans, can aid in improving your personal-finance standing and credit score. Regularly monitoring your credit utilisation and ensuring it remains below 30% is essential for fostering a good credit score.
