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Understanding personal finance is an essential skill that is often overlooked. Rarely do they teach students in high school how to manage money, even though it should probably be a mandatory subject? As a result, many adults don’t really know what it means to have and maintain good credit. In the long-run, this can lead to having a bad CIBIL score, and in turn, difficulty in getting loans. But there are ways to turn the situation around. Keep reading to find out tips and tricks on improving your credit score.
A CIBIL Score, or a credit score, is a number from 300-900 that acts like a grade for the way that you manage credit. For example, in very simple terms, if you don’t pay your loans and credit cards on time, then you’ll likely have a low credit score. Meanwhile, someone who is very responsible with credit cards and loans will have a number closer to 900. The reason for its importance is the fact that banks and other lenders will use the CIBIL Score to determine whether you are creditworthy when you apply to a loan. This can really affect your ability to make large purchases, such as a car or a home.
Various factors go into calculating a credit score. The credit company issuing your score will collect the history of all your credit-related transactions and develop a report. Based on this, they will determine the score. Besides simply paying on time, considerations include credit utilization, applications for loans, the credit mix that you own, and your most recent behavior patterns. So how do you keep on top of all these factors? Here are some tips:
The first step is to find out what your current CIBIL Score is. This way you know for sure if you are below 750 (which is more or less where you want to be), and how much of a gap you are facing. It also gives you an idea of whether you should try applying for the loan or credit that you need, or to wait and improve your rating first. You can order your score from TransUnion for about 550Rs. and will receive both your score and your credit report. It’s probably a good idea to review your report in detail to understand what is bringing your score down. This way you can take targeted actions to improve your credit score.
One of the easiest ways to improve your credit score is to pay your loans and credit cards on time. The way that you treat your current credit accounts for about a third of the way you CIBIL score is calculated. That means that if you are always paying off your debt on time, even if it’s just the minimum required, then you are already in better shape. Of course, this is simple to say, but can be a challenge depending on your finances. If you are unsure how to manage the payments, talk to a financial advisor who might have some ideas on the best way to do so.
This is an important step and does require some patience and perseverance. Once you’ve ordered and received your CIBIL score and report, review it infinite detail. While generally correct, there could be an error here or there. And this could affect the way that your report reads. Appealing can be a tedious task, but it’s definitely worth it if the error is bringing your score down.
Mistakes of the past should not define us. Unfortunately, with a credit report, they often do, since it considers the way you manage your loans over your lifetime. But it does give particular weight to the last 2 years of your credit history. If you are just now looking at a way to improve your CIBIL Score then consider ensuring that you are on top of all your key strategies for 2 years straight.
What many people don’t realize is that your credit limit is not what you should be using. When you max out your credit cards, it signals that you do not have enough liquidity to cover your day-to-day expenses. So it’s best to keep your credit use to 30% or less, while still using your credit cards on a regular basis to show transactions. One great trick for this is to allow banks to increase your credit limit. You have probably received phone calls from your bank in the past offering you more credit. Next time, make sure you take the increase, giving you more room to stay in the 30% zone.
The mix of credits that you maintain is another important factor in the way that your CIBIL Score is calculated. Unsecured loans, meaning a car or a personal loan, for example, don’t reflect very well on your score. Meanwhile, a secured loan, which is typically one used to purchase a home or to pay your education tuition, is a great addition to your portfolio.
Last but not least, don’t apply for too many loans or credits. It can be tempting to go out and submit an application for every bank out there, to see if someone does get you that credit. But this can flag you as credit hungry and lower your credit score. Instead, try researching the banks in detail first. It is also helpful to get your credit score before you start applying, to understand what your chances are of actually getting a loan.
Loans and credits can sound a little scary. But they are actually not rocket science. Once you get the formula right, you can maintain a high credit score and manage your finances in the way that suits you. Just learn the tips and tricks to win in today’s financial system.