Every time you apply for a credit card or a loan, the lender checks your credit score to determine your creditworthiness. A higher credit score improves your chance of approval and may help you get loans at comparatively lower rates of interest. However, if you already have a poor credit score, you can still take certain steps to improve it. One of the first steps is to check credit score and thoroughly go through your credit report to understand why your score is dropping. Below, we have talked about some of the ways how you can practice financial discipline and improve your credit score.
- Make timely payment of your dues
Your payment history has the biggest impact on your credit score. Timely payment of your credit card bills and loan EMIs helps you improve your credit score. However, missed payments or late payments affect it negatively. Late payment of your credit card dues shows up in the ‘Days Past Due’ section of your credit report, which shows the number of days by which your payment is delayed. For example, if you miss paying your bill for an entire month, it will show 30 days past due on the report. A delay as severe as this can lead to a major dip in your score. This is why you must always pay your dues on time.
- Do not exhaust your credit limit
While using your credit card, you should keep a check on your Credit Utilization Ratio (CUR). It is the ratio of the credit limit utilized by you to the total credit limit. One of the reasons for a poor credit score could be a higher CUR. When you frequently max out your credit cards, it increases your CUR and shows that you are a credit-hungry borrower. In order to improve your credit score, you can try to bring down your CUR by requesting your card issuer for a limit increase. Alternatively, you can also apply for a new credit card to increase the overall limit available to you and lower the burden on your existing credit cards.
- Limit the number of hard enquiries
Every time you apply for a credit card or a loan, the issuer requests the credit bureau for your credit report, which is known as ‘hard enquiry’. Occasional hard enquiries do not affect your credit score, but multiple hard enquiries within a short span can significantly lower your score. Also, applying for multiple credit cards at a time reflects that you are an impulsive borrower, which represents a bigger risk. The lender might hesitate to give you a credit card in such cases. To avoid a situation like this and improve your credit score, you should wait for a few months before applying for a new loan or card.
- Check your credit report at regular intervals
Your credit report is a summary of how you use your credit card. Bureaus generate your credit report based on the data shared by lending institutions. Any clerical error by the lender or bureau may lead to a drop in your credit score. For instance, a loan or credit card account may wrongfully be opened in your name or dues you have already paid might not reflect in your report. Hence, checking your credit report regularly will help you identify and rectify such errors and resolve these issues.
- Consolidate your debts
If you have a low credit score due to unmanageable credit card debt, you can go for a balance transfer. On transferring the balance to another card, you can pay off the dues in instalments at a comparatively lower interest rate. However, if you have unpaid dues on multiple credit cards and finding it difficult to pay off, you can also apply for a personal loan to consolidate these debts. A single loan will be easier to pay off and gradually improve your credit score.
So, these were some of the few things which you must implement in order to improve your credit score. You can fetch a free credit report every year from all four credit bureaus in our country (CIBIL, CRIF High Mark, Equifax, and Experian). Check your credit report at regular intervals to save yourself from a falling credit score.