Are you planning to buy your dream home or pursue higher education at top international universities? Securing a sizable loan is a crucial step to taking the next big leap in your life. Here your credit score can make or break the game. But what is it, and how can you improve the score?

What is a credit score? And, What Is a Normal Credit Score For an Average Citizen?

A three-digit credit score determines the creditworthiness of a borrower. It is a measure of your financial health and discipline. The score is based on your credit history, repayment history, cumulative debt level and number of accounts. Lenders and financial institutions use the credit score to assess your loan or credit applications before approving them. A good score proves your accountability and increases your chances of getting better deals.

There are six major SEBI-registered credit bureaus in India, namely,

• Experian
• ICRA
• CRIF High Mark
• Credit Rating Information Services of India Limited (CRISIL)
• Equifax
• TransUnion Credit Information Bureau (India) Limited (or CIBIL)

TransUnion CIBIL is one of the four credit bureaus in India that provide credit score reports. CIBIL scores range from 300 to 900. An average CIBIL score lies between 550 and 650, while anything from 650 to 750 is a good score.

But, why should you care about your credit score?

A credit score reflects your financial health and comes into play when you want to take a sizable loan. Be it a home loan, car loan or educational loan, lenders and financial institutions will give a significant weightage to your credit score. With a good score, you can also enjoy better interest rates on credit cards, loans and mortgages, reduced car insurance payments, lower security deposits, and access to higher credit limits.

What can hamper your credit score?

Unfortunately, there are a few ill-practices most people fall prey to that impede the credit score. Here are four habits to avoid if you want good scores:

• Thin or zero credit history: The length of credit history is an essential factor as it proves that you can reliably repay the loans. Age plays no role in the credit score calculation, but the length of credit history is crucial. Having no credit history for staying debt-free may not be the smartest choice in the future.

• Missed or delayed payments: Late payments adversely affect the credit score because lenders see you as a defaulter, which reduces your creditworthiness.

• Multiple requests for new credit lines: Each time you apply for a new credit line, it leads to a hard inquiry, which lowers the score. Multiple inquiries in a short span make the lenders suspicious and show that you are trying to borrow more than you can repay. It negatively impacts the score.

• Too much credit use: Having multiple credit lines indicates that you are overstretched and can struggle to repay new debts.

So, what happens if you have a low credit score? It gives a negative impression of your profile to the lenders. They consider high credit use and late payments as a risk factor. Such an impression can weaken your credit application, and lenders are less likely to approve the loan. You may also not get the best interest rates.

How can you improve your credit score?

You already know the don'ts. Now, let's take a look at a few practices that can improve and strengthen your credit score.

1. Review credit reports:

When improving credit scores, the first step is to review the credit reports to find inaccuracies and components impacting the score, such as missed payments. It helps you take corrective measures and plan ahead.

2. Pay on time:

Try to pay credit card debts in one billing cycle. Timely EMI and bill payments increase the score, and you appear as a responsible and prudent borrower. Payment history significantly determines the credit score. To avoid delays, you can automate the payments or set reminders.

3. Limit credit utilisation:

Maintain a lower credit utilisation rate, typically below 30%. Restrict your credit usage and preferably avoid spending till the maximum credit limit to improve your credit score.

 4. Keep old accounts active:

Even after paying off an old loan, try to keep the account open so it lengthens your credit history. It also increases the credit score.

 5. Choose longer tenures:

When taking a loan, choose a longer repayment tenure since it will bring down the EMI amount, and you can make the repayments with delays or defaults.

Bottom line:

It is important to remember that your credit score has nothing to do with your income, investments or savings. It is concerned with debt activities and credit history. Maintaining a decent credit score is not tough if you know the dos and don'ts. Adequate financial literacy is the key to better credit and wealth management. You can find all the necessary information in the Dayco app.

Hope this article helps you reach optimum financial health!

~Nischay Avichal