Steps to Improve Credit Score

Your credit score is one of the most important factors in your financial life. Regardless of how much you earn, understanding how to improve your credit score is essential for effective financial planning. If you ever decide to take a loan, your credit score will be a key factor that helps lenders determine the interest rate and whether to approve your loan. If you haven't started working on it yet, it’s never too late.

This blog will discuss how to improve your credit score and other relevant factors.

What Does Credit Score Mean?

Your credit score is a numerical representation of your creditworthiness, derived from your past credit activity. It tracks various aspects, such as the number of loan accounts you hold, credit inquiries regarding your credit history, your payment history, and your credit utilization ratio. This score is a three-digit number assigned to you by credit rating bureaus (CRBs) based on the information collected from various financial institutions.

Steps on How to Improve Credit Score

If you notice your credit score declining and are concerned about how to improve it, the following steps may help:

1. Be Disciplined in Payments

This is the first and most crucial factor determining your credit score. Pay your bills on time, regardless of the types of EMIs you have due. If you are juggling multiple credit card bills and EMIs, consider setting reminders to avoid missing deadlines.

2. Keep Your Credit Utilization Ratio in Check

The ideal credit utilization ratio is 30% of your total available credit limit across your credit cards. If you have exceeded this, try to bring it down to at least 50%. This ratio is calculated by dividing your total debts by your total available credit limit. Maxing out your available credit creates the impression that you rely more on borrowed funds and struggle to manage your finances.

3. Request for a Credit Limit Increase

If you use credit cards and have consistently made payments, you can ask your bank to increase your credit limit. However, ensure you don’t exhaust it, as this will help you maintain a healthy credit utilization ratio.

4. Avoid Taking Multiple Loans at Once

Even if you're facing a cash crunch, avoid applying for multiple loans simultaneously. This reflects a weak financial position and can lead to a cycle of credit, increasing the chance of default.

5. Avoid Closing Your Credit Card

If you have a credit card you don't need, it's better not to use it rather than closing the account. Closing a credit card can decrease your credit utilization ratio and negatively impact your credit score.

How to Check Your Credit Score?

There are four Credit Rating Bureaus (CRBs) in India: CIBIL, Equifax, Experian, and CRIF. Each bureau collects your credit information and creates a report based on it. They are also responsible for assigning you a credit score.

To check your credit score, visit the official website of any of the bureaus. For example, to check your CIBIL score, follow these steps:

1. Click on “Check my CIBIL score.”
2. Choose a subscription plan that works best for you.
3. Fill in your details and make the payment.
4. Once the process is complete, you will receive your credit score and report via email.

You can also check your credit score from the websites of other CRBs, banks, and financial institutions for a fee. Most banks, NBFCs, and fintech companies offer a free credit report once a year.

Takeaway

It takes little effort to damage your credit score, but building a good score takes time. Now that you know how to improve your credit score, the final step is to remain disciplined and patient. Consistency over at least six months is necessary to see a significant increase in your score.