A credit score is a 3-digit number that indicates your ability to repay and your creditworthiness with lenders. This score varies between 300 and 900, with any score close to 900 being considered ideal by credit institutions and NBFCs.
Generally, a credit of 750 is effective for a person to apply for a loan. So, if this score drops below 750, applicants will find it difficult to get loan approval. This is why it is essential for you to maintain a good credit rating.
9 Best Approaches to Improve Your Credit Score
The need to increase your credit score will arise if you want to qualify for a new loan or a new credit card. This score is analyzed by several factors like debt amount, repayment history, repayment duration, etc. Now that you have an idea of the importance of credit score, let’s see some effective tips that you must take into account to improve it:
Here are the top nine effective ways to consider improving their credit score:
- Clear dues on time
If you have a loan, you must repay it during the term in order to improve your credit score. Since payment history is a critical factor that lenders consider when evaluating this score, you should not keep track of late payments or failed payments as this will lower your credit score. .
Therefore, it’s a good idea to use payment notifications or opt for a direct debit feature so that you can clear your overdue payments, EMIs, and credit card charges on time.
- Limit the use of credit
Another beneficial way to increase your credit score is to lower your credit utilization rate. Lenders check an individual’s credit utilization ratio at the time of granting credit. Therefore, in order to maintain a healthy credit rating, you must maintain a credit utilization rate below 30%.
This ratio refers to the current credit you owe divided by the total amount of available credit. Thus, you must keep your credit utilization rate below 30%. By doing so, you can track the money you use while holding more than one credit card.
- Plan your credit wisely
One of the best approaches to improving your credit score is to develop a proper plan to use your credit wisely. Asking for too many credits tends to increase your credit limit. However, your failure to repay dues on schedule will significantly affect your credit score.
Moreover, opting for several loans unnecessarily and not being able to repay them will affect your financial situation. So be sure to plan, apply, and use your credit when you really need it.
- Maintain an ideal credit mix
As far as loans are concerned, they are categorized into two types – secured and unsecured. When you opt for too many unsecured loans like business loans, personal loans, education loans, etc., your lender may reject your loan application considering you credit greedy.
Moreover, these loans are offered without any collateral, which involves a higher risk than secured loans, such as car loans, home loans, etc. To overcome such circumstances, you can keep a good balance between secured loans and unsecured loans to maintain a good credit rating.
- Maintain a limit on difficult requests
Inquiries are of two types – deep inquiry and soft inquiry. An informal inquiry occurs if your lender offers you a pre-approved credit card or when you assess your credit report. Generally, these types of inquiries do not influence your credit score.
However, while talking about tough demands, it happens when you go for a loan. Even if serious inquiries do not affect your credit rating, it will still decrease if these inquiries occur on a recurring basis. Thus, you must maintain a restriction on difficult requests to maintain a good credit rating.
- Analyze credit report
Another great way to boost your credit score is to check your credit report. By doing so, you can spot errors in your credit report so you can rectify them as soon as possible. Since the credit score is analyzed according to the information given in the credit report, you must ensure that your report is absolutely flawless.
- Avoid applying for multiple loans on a recurring basis
Try to avoid opening unnecessary loan accounts and using too many unsecured credit cards far beyond your capacity. Indeed, the repeated opening of new loan accounts will determine the incompetence of your current loan accounts to meet your financial needs. Sooner or later, your credit-intensive activities will put a heavy loan burden on you and your credit score will drop dramatically.
- Avoid closing old accounts
Always try to avoid closing your old accounts or credit cards, as it is not a sensible decision. This is because it shows your longstanding association with your financial institution and your long repayment history. Therefore, when you close your old credit accounts, the importance of your previous payment record will be in vain. Plus, you will end up worsening your credit score.
- Use secure credit cards
Another effective approach to building or improving your credit score is to use a secured credit card. This specialized card is funded by cash deposits that you must pay beforehand, and the amount of the deposit will be equal to your credit limit.
Generally, this card helps people who have a low credit score or an ineffective credit history. By using a secured credit card, you can make timely payments, thereby increasing your credit score.
Now that you have understood how to improve your credit score and maintain a proper credit history, you can easily do so by considering the tips mentioned above. Also, if necessary, get help from professionals to guide you through this issue.