Building a credit score of 800 and above requires diligent effort. Here’s a step-by-step guide to help you achieve this goal.
Credit score plays a pivotal role in determining an individual’s financial health and access to credit. This score serves as a numeric representation of a person’s creditworthiness, based on their credit history and financial behaviour. One of its primary significance lies in its role in determining eligibility for various forms of credit, including loans, credit cards, mortgages, and even utility services.
Lenders use credit scores as a key factor in assessing the risk associated with lending money to an individual. A higher credit score signifies a lower risk borrower, which often translates to better loan terms, lower interest rates, and higher credit limits. A low credit score may result in limited access to credit or higher interest rates, making borrowing more expensive. Maintaining a healthy credit score is essential for financial stability and access to various opportunities.
Building a credit score of 800 requires diligent effort. Here’s a step-by-step guide to help you achieve this goal:
Always pay dues and EMIs on time
If you cannot pay the entire dues, at least pay the minimum. Avoid missing even a single payment and that will positively impact your credit score. Automate your credit card payments and clear your dues before the deadline. Avoid making late payments.
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Spend Within Your Limit
A high credit utilisation ratio (CUR) moderately hurts credit score. What is CUR? It is the percentage of your available spending limit in a month. Let us say you had two credit cards, each with a spending limit of Rs 1 lakh. You spent Rs 55,000 on one card and Rs 75,000 on another. Your total spend is Rs 21.3 lakh out of a total limit of Rs 2 lakh, so your CUR is 65 per cent. This is very high. It will pull your score down. Keep it to 30 per cent or less, and do not forget the first rule: always pay the dues on time.
Try Paying Full Amount
If you keep paying minimum amount due, your dues will keep increasing because interest adds up. If the dues increase, your CUR increases, which we know is bad for your score.
Don’t Cancel Your Credit Card
Do not cancel it unless necessary. The older your credit card is, the better it is for your credit score. It shows you have held on to this credit line for many years without getting into trouble with it. That shows creditworthiness. It might be possible you do not like your card and want a better one. You could just ask your bank for an upgraded card with better benefits.
Don’t Apply for Too Many Cards or Loans
Select one option thoughtfully as per your eligibility and apply for it. Each time you apply for a credit line, the lender checks your credit history. This is called a ‘hard’ check of your credit score. Each hard check mildly lowers your score. Several hard checks can substantially lower your score.
Make Use of Your Credit Card
Do not just keep it in your wallet. An active credit life with timely and full repayment will improve your score bit by bit, and provide you rewards, deals and discounts, which other modes of payment may not.
Do A Monthly ‘soft’ Check
Soft checks are your own credit score checks and can be done as many times as you want. Soft checks do not harm your score. Monthly checks are also important because they can help you identify errors in your credit report, which can then be flagged to your lender and credit bureau. Errors can also damage your score. Your credit score as well as all loan accounts are linked to your PAN. If someone were to fraudulently or erroneously use your PAN to take a loan, the loan would get tagged to you. If there would be a default on this loan, your credit score would suffer. Errors flagged to the credit bureau and lender must be rectified.
Avoid Settlement If Possible
This option is given by banks to defaulting borrowers unable to pay their dues for any reason. Through it, the bank asks you to pay a fraction of your dues towards interest and principal, consider the loan account settled. For example, suppose you defaulted on dues of ₹4 lakh and the bank asked you to pay 1 lakh to end the matter. It sounds like an easy way out. But taking this option will destroy your credit score. The settlement may become the basis for rejection of your future loan applications. Lenders will see you as a high-risk borrower.
Therefore, aim to pay your dues in full, even if you are not on time. The only acceptable account status from the point of view of your credit score is ‘closed’. It means the loan principal and interest were paid in full.
Hope these tips will help you reach a score higher than 750 and make your financially journey hassle-free. Your credit score is your financial score card so pay attention towards improving it.
(The author is CEO, Bankbazaar.com. Views are personal)
