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Understanding credit scores: Key tips for maintaining a high credit rating

Upstox
By Upstox News Desk

3 min read | Updated on June 01, 2024, 00:01 IST

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SUMMARY

As a three-digit number ranging between 300 to 900, a credit score has a lot to tell about an individual’s creditworthiness. Banks or financial institutions would either be keen to extend you a loan or shy away from doing so, all depending on your credit score. There are healthy habits to adopt to ensure the credit score remains in the green.

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All about credit score, here’s how to improve it

A credit score remains an important parameter to assess the creditworthiness of an individual. The ability to make a timely payment towards a particular loan is referred to as creditworthiness.

The Reserve Bank of India (RBI) has approved four credit bureaus or credit information companies: TransUnion CIBIL, Experian, Equifax and CRIF High Mark.

A three-digit number measured between 300 and 900, credit bureaus normally calculate the credit score. Based on an individual’s credit history, which can range from loan repayment history to credit card repayment track record, a credit score is calculated.

Generally, a credit score of 750 and above is considered excellent. A score between 650 and 750 is regarded as average and anything below 650 falls in the poor category.

A credit score dips slightly every time one applies for a new loan. A borrower missing out on paying a loan equated monthly installment (EMI) affects the credit score negatively.

Interestingly, the closing of an existing credit card that has been used for a long time, impacts the credit score negatively.

Tips to improve credit score:

Clear outstanding debts on a timely basis: Ensure to pre-pay the debts before the loan term expires. This would also save money on potential monthly interest. Moreover, avoid using the credit limit to the maximum. That outstanding credit card bill and overdue loan amount need to be paid on time. This reduces debts and improves the credit utilisation ratio (CUR).
Maintain CUR: Credit bureaus consider a CUR to calculate the credit score. It is the ratio of the total credit card balances and total credit limit. Any utilisation on the higher side will hurt the credit score. This is despite when balances are paid on time. The ideal credit utilisation ratio ranges anywhere between 35% and 40%.
Limit credit usage: Excessive use of credit cards, and opting for too many personal loans, car loans, or other such loans will lead to a negative credit score.
Opt for bigger credit limits: Any increase in credit limit and your outstanding balance remains the same, your CUR instantly lowers. This helps to improve your credit.
Maintain a healthy credit mix: A blend of secured and unsecured loans such as credit card loans can influence credit scores.
Check your credit report: Check for accuracy of data. Approach the concerned lending institution or bank In case you come across any inaccuracies, and get it rectified without any delay.
Refrain from multiple loan applications: Avoid applying for a fresh loan immediately after being rejected once. Multiple rejections could lead to a dip in your credit score.

About The Author

Upstox
Upstox News Desk is a team of journalists who passionately cover stock markets, economy, commodities, latest business trends, and personal finance.

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