Did you know that having a good Credit Score paves the way to your financial freedom? This Independence Day, aim to get your Credit Score on track and enjoy financial freedom like never before.
What Is A Credit Score?
Credit Score is a 3-digit number that describes your financial credibility. It is basically the summary of your so-called “financial habits”. The score generally ranges between 300 – 900 points. The higher the score, the better the credit history. Most banks demand a score of 750 and above before granting a financial product. With a low Credit Score, it may get tougher to apply for a loan or a Credit Card. In short, banks and other financial institutions use your Credit Score to determine whether you are creditworthy or not.
Additional Reading: 6 Credit Cards If You Have An Excellent Credit Score
Factors Affecting Your Credit Score
Here are some of the key factors that affect your Credit Score:
- Default on loans/Credit Card repayment: It is no surprise that a non-payment on either a loan or a Credit Card repayment can land you in a soup. Defaulting on these credit instruments have a detrimental effect on your Credit Score. Each time you default, your score lowers, and ultimately you fall in the red zone!
- No Debt: While you may be startled by this information, it is true that if you have never borrowed money or have had no past history of borrowing, your Credit Score gets affected. Credit rating companies like CIBIL often rate a person based on his previous borrowing and repaying history. So, when you don’t borrow it means that banks can’t gauge your repayment ability.
- Multiple Credit Card Applications: Yes! This is true. Surprised? Well, don’t be. Whenever you apply for a Credit Card, the issuing company cross checks your credit history with a credit bureau. And when the credit bureau notices that you have applied for multiple cards within a short amount of time, they categorise you as someone who is desperate for credit and, therefore, question your ability to service a financial product.
- Being A Loan Guarantor For A Loan Default: Sometimes you may find it hard to say no to someone who requests you to be their loan guarantor. The first thing you do is oblige. But when the applicant of that loan defaults, then, you face the brunt of a low Credit Score.
- Closing A Credit Card: Often people are mistaken and presume that once they have repaid their outstanding Credit Card debt, they can close their Credit Card account. And by doing this, they will add brownie points to their Credit Score. But this is not true. Because when you close a Credit Card you have a shorter credit report and it is by no way a means to improve your Credit Score. However, if you have an active Credit Card and have been diligent with its payments, then it boosts your Credit Score for the simple reason that you have a good credit history of paying back your debts.
Additional Reading: How Long Before Your Credit Score Starts To Improve?
How Your Credit Score Affects Your Financial Independence
Now that you have understood the factors that impact your Credit Score, it is pretty simple how these very factors can curb your financial independence. Think about it. When your Credit Score is low, you end up looking like a person who is financially unstable. Sigh!
Being financially unstable means that you aren’t capable of repaying any loan or other payments. This means that you won’t be eligible for any loans or Credit Cards in the first place.
So, what would you do if you’re in dire need of money then? Well, it can be quite crippling when you don’t have enough money in your Savings Account or get denied a loan during an emergency. Although your loan application can get rejected for a number of reasons, not having a good Credit Score is a critical factor. Therefore, it is very important to maintain a good Credit Score to be financially independent.
Sure, you can save enough money for a rainy day. But it’s not certain that your savings can always save you from a precarious situation. And not being in a position to resort to other options can be daunting.
Additional Reading: 8 Reasons To Take A Personal Loan To Boost Your Credit Score
Ways To Boost Your Credit Score
So, what can you do to change your Credit Score? Well, there are a bunch of things you can do to improve your score. Sit tight while we take you through some tips that can boost your Credit Score and lend some hope to be financially free!
It is no secret that prompt repayments are the best way forward. This only goes to show that you are responsible and are stable financially to repay any debt that you have taken over. Set reminders for yourself to make these payments. In time, you’ll be able to boost your Credit Score.
Keep A Check on Credit Utilisation
Credit Cards come with a credit limit. When you have a higher limit on your card, say for instance Rs. 1 lakh, and you spend Rs. 50,000, you have already utilised 50% of your credit limit. A high credit ratio has a high impact on your Credit Score. Keep your credit utilisation within 30% to 40% to keep your Credit Score up.
Get A New Credit Card Or Apply For A Loan
If you are someone who assumes that not having a Credit Card or a loan can help you keep a high Credit Score, then you are mistaken. Because without any credit history, you won’t have a Credit Score. What really helps to build your score is, having a credit instrument and keeping up with its repayments.
Check For Errors in the Credit Report
Your credit report is compiled from data reported by your lending bank to credit bureaus. So, there is a fair chance that there could be mistakes in this report. This can happen in cases where data is collated from lenders who haven’t updated their systems despite you closing out on your loan/payments.
Sometimes, a false late payment reported can also totally mess up your score. Or you could be assigned a PAN of a defaulter! Hence, make periodic checks on your report to rule out such errors. And follow up with the Credit Bureau to fix these errors. You may be required to submit a few documents as proof, so keep them handy.
Having trouble with your Credit Score? You can check your Credit Score for FREE by clicking on this link. And if you’re wondering about ways to enhance your score, then you’ve come to the right place.