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31 MAY, 2022
Credit score plays a crucial role in helping people obtain better terms and reduced interest rates on loans. It is one of the most significant deciding factors in loan approvals. Since it represents the borrower's repayment history, it is a very accurate measure of an individual's creditworthiness in the market. There are numerous ways to improve your credit score. Contrary to the popular opinion of credit cards being a shortcut to the debt trap, they can help you improve your credit score and get better terms on credit in future. It is one of the most underrated benefits offered by the best credit cards. Unfortunately, since most people fail to repay their credit card bills timely, they cannot improve their credit score using the same. Let's take a quick dive into how you can achieve your credit score goals.
Pragmatic tips to improve your credit score
A credit score quantifies an individual's creditworthiness based on multiple credit-related aspects. This includes the borrower's repayment history, duration of credit, credit mix, credit utilisation ratio, etc. Here are some practical tips to be mindful of to increase your credit score.
1. Keep an eye on your credit score
The first step in improving your credit score starts with keeping an eye on your credit score. Checking your credit score at regular intervals will help you learn about any increase or decrease in the same. It is important to note that you shouldn't conduct a hard-line credit enquiry. A hard-line credit enquiry can impact your credit score negatively. However, running a soft-line credit enquiry monthly or bi-monthly is highly recommended. Try to maintain a credit score of over 700 points.
2. Pay outstanding bills timely
One of the most significant factors used to compute credit history is related to repayment history. It has the highest weightage in the overall credit score computation. Any outstanding credit card bills or loan EMIs must be repaid immediately to improve the credit score in the near future. A history of delayed payments will make lenders question your creditworthiness. Sometimes people forget to make their bill payments on time and run into a tricky situation. Try setting alerts for the due dates. Moreover, most people are habitual of paying just the minimum due amount, but it’s crucial to pay all the pending balances to improve the credit score.
3. Credit utilisation ratio
Another critical factor considered while calculating the credit score is the credit utilisation ratio. The credit utilisation ratio can be defined as the amount of revolving credit used by an individual divided by the total revolving credit limit available. It is a percentage of the total credit limit utilised. A higher percentage would indicate that you are highly dependent on your credit line for managing your finances. However, a lower ratio will suggest that you have a stable income source to meet your financial needs. Keeping the credit utilisation ratio lower than 40% of the overall credit limit available is recommended. In addition, if you have more than one credit card, you can try using them equally. This will help avoid exhausting the credit limit of one card and positively impact the credit utilisation ratio.
4. Refrain from removing old credit accounts
Many credit card users often try to remove their old credit accounts from the report after making the payment and clearing the outstanding debt balance. However, it is essential to note that eliminating old credit accounts can do more harm than good. One of the crucial factors in computing your credit score is related to the duration of your credit. An old credit line will make you more reliable as a borrower than a new credit card.
5. Debt consolidation
Another interesting way to improve your credit score is by practising debt consolidation. Most people are not aware of what debt consolidation entails and therefore avoid doing the same to improve their credit score. However, if you have multiple debt accounts, you can ask the bank to issue a large debt that could help you meet the existing multiple debt obligations. Once you have cleared your multiple existing debts by using funds from the new consolidated loan, your credit score will improve on account of good repayment history. You can then choose to repay this debt as per your convenience and the terms of the new loan.
6. Plan your credit activities wisely
Most people don't spend much time planning their credit and finances in advance. They often indulge in taking multiple credit cards to meet their expenses which leads to a poor repayment history when they fail to repay the outstanding balance timely. Unplanned loans and credit cards are a shortcut to debt traps. When you are taking a loan, you must plan on how you'll be repaying the same in due time. Learning about your income projections and repayment capacity is the key to avoiding falling into a debt trap. Planning your finances and credit activities wisely can save you from a pile of outstanding debt, which can diminish your credit score.
Using credit cards to improve credit score
As we discussed earlier, a credit card could be a great asset for improving credit scores when used wisely. Here are some best practices to follow for using credit cards to your advantage.
1. Choose the right credit card
Choosing the right type of credit card plays a massive role in improving your credit score. Opt for the best credit card that rewards you for your spending habits. For example, go for a travel credit card if you are a frequent traveller. You will be able to earn discounts on hotel bookings, flight tickets, restaurants, etc. It will help you save money and reduce expenses. Moreover, if you have dinner outside frequently, you can select a card that rewards you for dining and shopping. A few financial institutions also have forged partnerships with eCommerce platforms, entertainment outlets, merchants, etc., to provide bespoke offers.
2. Look for interest free EMIs
You should search for interest-free EMIs while paying through credit cards to reduce the interest burden, especially for high-ticket items. It will be easier for you to repay the bills in easy EMIs without worrying about interest payments.
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