Building a Good Credit Score: Best Practices and Common Myths

One of the most crucial criteria in getting the best credit cards, quick loan approval, and the capacity to negotiate interest rates is the credit score. The likelihood of gaining all of these benefits increases with higher credit scores. It is significant to note that although a borrower with a low credit score may be approved for a loan or credit card, the loan or credit card will come with a higher interest rate.

It is essential to first comprehend the causes of a low credit score before taking action to raise it in order to prevent circumstances that result in higher loan interest rates or challenges during the loan/credit approval procedure.

What is a Good credit score?

A borrower's creditworthiness is shown by a three-digit numerical summary called a CIBIL score. It is determined by the borrower's current income, credit history, financial situation, and other criteria.

• The range of credit scores is 300 to 900.

• A credit score between 750 and 900 is regarded as outstanding, while one under 650 is regarded as fair.

• Lower loan interest rates, a higher credit utilisation ratio, more negotiating power, and other advantages come with a high credit score.

What are the Reasons behind a Low credit score?

The following are a few factors that contribute to low credit scores and can prevent many loan or credit-based opportunities:

• A dismal repayment history

• Greater credit utilisation ratio using more than 30% of your available credit will lower your credit score.

• Several difficult questions

• The credit report has a lot of mistakes and comments.

• Bad credit management (secured and unsecured loans)

Best practices to improve your credit score

The techniques outlined below can assist borrowers in raising or improving their credit scores; but, if they are not used appropriately, they can also result in a borrower's credit score being negatively impacted.

• Repayment history

To raise your credit score, it's imperative that you make all of your credit card payments on time. Banks, lenders, or other financial institutions constantly assess a borrower's dependability when it comes to credit or loan repayment. A strong payback record demonstrates a borrower's performance over time and how committed they are to maintaining the same behaviour.

• Credit utilization ratio

Utilizing the credit utilisation ratio wisely is one of the key strategies for enhancing credit. You should not use more than 30% of the available credit for the CUR. The borrower's dependence on the borrowed amount is demonstrated by using a higher percentage of the CUR. It is advisable to keep the credit utilisation ratio at 30%, even if the borrower requests a higher CUR from the lending institutions in particular circumstances.

• Do not make multiple hard inquiries

Every time a borrower submits a loan application, the lending institutions conduct what are known as "hard inquiries." When these inquiries are conducted after an interval, they do not significantly lower the credit score. On the other hand, if these inquiries are conducted quickly, the credit score can be severely harmed.

Loan applications that are denied have a negative impact on credit score and are recorded in the credit report. Hard inquiries, denied loan applications, and credit reports taken as a whole form an impossible circle that needs to be broken. Therefore, it is advisable to pay off the acquired loan EMIs or credit payment before applying for a new loan or making an inquiry in order to avoid slipping into the credit trap.

• Fix errors

A borrower's credit score can be raised with an error-free credit report. As a result, it is advised to carefully analyse the credit report at least twice a year. It is best to register a dispute and have the issues fixed as soon as possible if there is a mistake, incorrect information, issues, or comments in the credit report. It is crucial to remember that any erroneous information that appears in the credit report can seriously harm the credit score.

• Credit card maintenance

Maintaining or using older credit cards for a longer period of time or until you can handle them is a fantastic strategy to raise your credit score. An old credit card keeps track of your credit history and contributes to raising your credit score.

Common myths about credit score

A high credit score is essential to your financial stability since it can give you access to the greatest credit card and loan deals. The process of increasing or preserving a high credit score by responsible behavior, however, is ongoing. One must be aware of the "good and desired" behaviors that boost your credit score and avoid the undesirable ones. Here are some prevalent misconceptions about credit scores:

• Checking my credit score reduces it.

False. This is undoubtedly the most widespread fallacy, despite the fact that 93 percent of millennial are aware of their credit score. You can measure your progress when establishing credit by keeping an eye on your score, but it's crucial to check it correctly.

An activity known as a "soft pull," such as checking your credit score, has no impact on your credit score. A "hard draw," such as when you apply for a credit card, momentarily lowers your credit score. Information won't harm you if you verify it from a reliable source, such as the credit bureaus themselves. Everyone will assume you are asking for credit if a friend who works for a car dealership or mortgage broker pulls your credit as a favor, which could result in a worse credit score.

• Having a credit card balance raises my credit score.

False. Your credit score won't be improved by carrying a balance; instead, it could be negatively impacted, and over time, it will become more costly due to interest payments. Not to mention, it’s a waste of money to pay interest on your balance if you can afford to pay off your credit card bill in full each month.

Your credit card use rate is directly impacted by outstanding balances on your account. Your utilization rate will increase as your credit card balance does, which could lower your credit score. Consider transferring an existing credit card balance to a balance transfer credit card if you already have one. This can help you save money in the long term, provided you commit to paying off your balance during the 18-month promotional 0 percent APR period (after, 13.49 percent - 24.49 percent variable APR) (after, 13.49 percent - 24.49 percent variable APR).

• My credit score is impacted by my salary.

False. Your income and salary are viewed as indicators of your ability to pay your expenses, not of your likelihood of being denied credit.

Income isn't even on your credit reports, so it can't effect your score. Credit scoring models don't take wealth measurements into account.

While it's helpful to know that your income level has no bearing on whether you have excellent or bad credit, you should be aware of the factors that do. Your payment history, the amount you owe (utilization rate), the length of your credit history, your use of new credit (how frequently you apply for and create new accounts), and your credit mix are all factors (the variety of credit products you have).

• A high credit score indicates wealth.

False. Credit scores are merely a risk indicator (whether you pay your bills on time and in full). If you have a high credit score, you are a good credit risk; if you have a low score, you are a terrible risk. They merely mean that.

However, if you update your income with a card issuer to a greater number, you may see an increase in your credit limit. This could help your credit utilization ratio even though a high salary doesn't guarantee a higher line of credit (as long as you continue to pay your balance in full each month).

• Your credit score doesn't have to be perfect.

True. There are no additional advantages to getting a perfect score, even though it would be amusing to declare you are a member of the exclusive 850 club. There are no loan or credit products that can only be obtained by those with flawless credit ratings, and if you hit a particular score, you essentially receive all the same advantages.

Conclusion

Credit scores have been increasingly common over time. In order to convince lenders of your sound financial capabilities, a high credit score is quite helpful. It ensures that you receive the best offers when applying for loans by demonstrating your history of sound financial management.

It is advised that you keep a regular eye on your credit score. By displaying your existing debts, pending payments, EMIs, and other obligations, it will help you keep a solid credit score. It will serve as a warning that you need to manage your money if you want to raise your scores.