Ways to Maintain a Healthy Credit Score and Profile

Everyone in today’s world must try their best to be as credit healthy as they can be. We live in times when everyone seeks financial assistance in the form of loans to fulfil major responsibilities and dreams, such as buying a new home or car, paying for a child’s education or wedding, etc. A healthy credit score and a strong credit profile give assurance to lenders regarding a borrower’s repayment capacity and therefore, lenders sanction loans to such people quickly and on favourable loan terms and conditions. Alternatively, when a CIBIL online check on a potential borrower shows a bad credit score, lenders become wary. If the credit score does not meet the minimum CIBIL score for loan requirements, lenders either reject the borrower’s loan application or sanction a loan at a high rate of interest to cover up for the risk involved in lending money to the borrower.

In this article, we discuss with our readers, tips on how to build strong credit profiles and also give suggestions regarding how to improve your CIBIL score. So, read on if your financial health is in a dubitable state. However, before we get to these tips, let us understand what makes up a credit profile.

What Makes Up a Credit Score?

Five factors make up a credit score. Let us understand each of these factors and the level of impact they have on your credit score.

Payment History

When it comes to credit score, an individual’s payment history is the most crucial factor that affects a borrower’s credit score. Most borrowers do not know this but credit history makes up 35% of an individual’s credit score. So, ask yourself: did you miss any EMI payments? How many times have you missed paying your EMI? How late were you in clearing the payment? Have you ever filed for bankruptcy? Have you ever foreclosed a loan?

Missing a single EMI payment will not affect your credit score too much. However, if you are someone who constantly misses EMIs, your credit score will be in bad shape. Bankruptcies and foreclosures do not help either.

Credit Utilization Ratio

Most credit card owners do not know that their credit utilization ratio has a direct and serious impact on their credit rating. The credit utilization ratio makes up 30% of one’s credit score. The credit utilization ratio is the percentage of credit used to credit available. Those who want a strong credit profile must maintain their credit ratio under 30%.

Length of Credit History

The length of your credit history also holds concrete weight when it comes to your credit score. The length of your credit history makes up 10% of your credit history. If you have been using credit cards and loan accounts for years now and you have been a responsible borrower, you will have a good credit history. In other words, the longer your credit history, the better your credit score. However, if you have only recently started using credit, you may find that your credit score is zero or negative. A credit score of 0 or -1 indicates that the borrower has only recently started using credit and therefore, there isn’t much information about the borrower to assign them a credit score.

Hard Enquiries

When a borrower applies for a loan, the first thing that a lender does is check the borrower’s credit score. Thus, every time you make a new loan application, your chosen lender will enquire about you and your creditworthiness. This is known as a hard enquiry. Hard enquiries show borrowers to be credit hungry. New credit applications or hard enquiries make up 10% of one’s credit score. Therefore, to keep hard enquiries to a bare minimum, borrowers should limit credit applications and apply for credit only when necessary. Borrowers must also know that when a borrower checks their credit score, it is known as a soft enquiry and soft enquiries do not impact a borrower’s credit score.

Credit Mix

Lastly, credit mix makes up 10% of a borrower’s credit score. Loans are of two types – secured and unsecured. Having a mix of both secured and unsecured loans assures lenders of a borrower’s ability to repay the loan on time and handle all kinds of credit.

Also Read: What Is Credit Mix and How Can It Improve Your Credit Score?

Now that we understand the various factors that affect a borrower’s credit score, let us share with our readers some simple tips on how to maintain CIBIL score.

Here’s How You Can Improve Your Credit Score

1. If you have taken a loan, be a responsible borrower. Make sure you are paying your EMIs on time. If you miss due dates because you find it difficult to keep track of due dates, set up auto-payments or payment reminders. If you have been missing EMIs because they have become unaffordable, sit down and figure out where you can cut your monthly budget and save money to honour your EMI commitments. 
2. Maintain your credit utilization ratio under 30%. Do not clear only the minimum due each month. Instead, try to clear the entire amount. If you are an extravagant spender, set credit limits on your credit cards. This will stop you from overspending. 
3. Many people make the mistake of closing old loan accounts, simply because they do not want to go through the hassle of maintaining different accounts. Do not make this mistake. As mentioned before, the longer your credit history, the better will be your credit score. 
4. Maintain a healthy mix of secured and unsecured loans. This too will help you improve and maintain your credit score. 
5. Lastly, check your credit report from time to time for errors. If some misinformation has been passed to a credit rating agency by a lender, the onus lies on you to get the mistake rectified. Further, know that rectifying these errors will take time. Further, it will take some more time for rectifications to reflect on your credit score. Therefore, if you see any error in your credit report, act immediately. 
6. Lastly, be patient. If your credit score does not meet the minimum CIBIL score for loan requirements, do not worry. Practise financial discipline, follow the tips above and be patient. It will take some time for your efforts to reflect on your credit report. Do not expect your credit report to change overnight. Keep at it and your efforts will bear fruits eventually. 

Final Words

A good credit score will not only help you get approved for all kinds of loans, but it will also help you avail yourself of loans on terms and conditions that will prove beneficial in the long run. So, understand the importance of maintaining a good credit score. 

Also Read: Easy Ways to Maintain a Good Business Credit Score