Your credit score plays an important role in the financial aspect of your life. It acts as a deciding factor when you are planning to either apply for a loan or get a credit card. Lenders like banks and non-banking finance companies (NBFCs) consider your credit report and credit score, before sanctioning your loan or credit card application. Your credit score helps lenders determine your creditworthiness and measure your ability to repay the borrowed sum.
A credit score is a measure of your creditworthiness which is presented in a numerical format. It ranges between 300-900, 300 being the lowest and 900 being the highest. You should always work towards maintaining a credit score closer to 900. Majority of banks and NBFCs consider a credit score of 750 and above as ideal. Let’s take a look at different credit score range:
A credit score in the range of 300-550 is considered as bad. If you have a credit score that falls in this range, you will need to take serious measures to improve it. Having a bad credit score will not make you eligible to avail a loan or get a credit card.
There are several factors that can hamper your credit score and decrease your chances of getting a loan or credit card. Let’s take a look at some of the main factors that can bring your credit score down:
Not checking your credit score
You should check your credit score from time-to-time, as it can go down drastically owing to some errors in your credit report.
Delaying payment of bills
Not paying your bills or EMIs on time is the biggest factor that can have a negative effect on your credit score in a massive way. You should avoid delays while paying your EMIs as well as credit card bills every month. You should maintain discipline and pay all the bills on priority as it will have a huge impact on your credit score. At the same time, you should try and pay all your bills in full amount and avoid paying minimum balance due. If you don’t pay your bills in full, you end up paying a lot of money in interest.
Maintaining high credit utilisation ratio
You should try and maintain a low credit utilisation ratio. This ideally means you should use only 15-30% of your credit card limit. Using your credit card limit to the maximum suggests that you are credit hungry and are not able to handle your finances. Exceeding your credit card limit and having a high credit utilisation ratio can negatively affect your credit score.
Closing old credit cards
Having a long credit history works wonders for your credit score. If you close your old credit cards, you lose out on years of good credit history and repayment behaviour. Hence, it is advisable to keep your credit cards active for as long as it is possible provided you are not losing money paying the annual fee.
Applying for multiple credit cards
Applying for multiple credit cards at a time can make you look as credit hungry. Therefore, it is advised to space out your credit card and loan application throughout the year instead of applying at the same time. A number of credit applications can trigger hard inquiries that can have a negative effect on your credit score.
Not reviewing your credit report
A credit report is a summary of all your personal information, credit transactions, current as well as past credit accounts, and repayments. Errors in your credit report can bring your credit score down. Therefore, it is better to check your credit report periodically. Since 2017, the Reserve Bank of India (RBI) has made it mandatory for all the credit bureaus in the country to offer one free credit report to consumers in one financial year. At the same time, you can also visit BankBazaar.com and check your free credit score.
Having multiple unsecured loans
It is important to maintain a good balance of both secured and unsecured loans. Having multiple credit cards and no loans will not help to improve your credit score intact. Therefore, it is better to have a good mix of different types of credit.
As mentioned earlier, your credit score is an important factor that is taken into consideration while availing loans or credit cards. Having a bad credit score does not make you eligible to get a loan or a credit card. Majority of the lenders will not be keen on sanctioning you any type of credit, as a bad credit score suggests you don’t have the ability to repay the borrowed amount.
There are several measures that will help you improve your credit score:
Majority of lenders like banks and non-banking finance companies consider a credit score of 750 and above as ideal.
How can I improve my credit score immediately?
Here are some of the ways in which you can improve credit score immediately:
A number of lenders offer preferential pricing to consumers who have a high credit score. With a high credit score you not only become eligible to receive a loan but also get discounts on interest rates, processing fees, and so on.