A credit score is a numerical depiction of your creditworthiness that determines if you will qualify for a future loan. Banks and financial institutions will not grant you loans or credit cards unless you maintain a good credit score.
What is a Credit Card?
A credit card is issued by a particular financial institution or bank that allows you to borrow funds for a given time to purchase goods and services with merchants who accept credit cards. Both unsecured and secured credit cards, when used soundly, can help borrowers to build a positive credit history.
While it is normal to resort to loans and credit cards for personal or commercial use, it is also undeniably necessary to maintain a good credit score.
What is a Good Credit Score?
Credit scores are estimated based on five crucial factors: payment history, due amount, length of the credit account, new credit frequency, and credit mix.
According to the TransUnion CIBIL’s website, the chances of your loan getting approved are higher if your credit score is closer to 900. A score of 750 or over is considered to be a good credit score.
Here are some easy steps to maintain a healthy credit score:
Create Credit Accounts
To have a good track record, you must have credit accounts in your name to start with. Most of the major lenders and card issuers report to the credit bureaus when you open a new credit account with them. These accounts may comprise of loans or secured cards or a good rewards credit card with zero annual fees.
Timely Payments of Your EMIs
You must always make your payments by the due date, no matter how many loans you take. If you fail to do so, your credit score will be adversely affected. Following that, your eligibility for loans will also be hampered.
A Judicious Use of Credit Cards
In simple terms, if you keep using a credit card of a renowned credit card company and make payments on time, it can bring you good fortune over time. With multiple credit cards, it becomes difficult to keep track of the credit card bills and their due dates of payment. Therefore, the fewer credit cards the better.
Bring Your Past-Due Accounts Current
Having an account current usually means that either there is no payment due on account of a recent payment or only the payment for the current month is due. Though your late payments show in the credit reports for a long time, it is always recommended to bring the accounts current to avoid further damage to credit history.
Carry a Balance but in the Right Way
You should pay your credit card dues on time and avoid any late payments. It is not bad to have a credit card balance if you pay more than the minimum every month to pay off your balance.
Stop Making Unnecessary Inquiries
Too many credit inquiries can take their toll on your credit score. Credit inquiries count for a certain percentage of your credit score.
Keeping a Check on Credit Utilization
Credit utilization is the percentage of the total limit that you are using at a given time. You must aim to keep your credit utilization below 30%. You can also improve the credit utilization ratio by asking your lender to set a higher credit limit.
Avoid Too Many Credit Cards
People with multiple credit cards find it difficult to maintain on-time payments. With every new credit card that you get, your credit score drops by a few points. Closing older cards can shorten your credit history, thereby hurting your credit score. To avoid such cases, you should not have too many cards in the first place.
Do Not Go for Debt Settlement
People tend to opt for debt settlement to curb the outstanding obligations. However, it negatively affects your credit score. Credit scores are allotted to reward accounts that make payments on time and as per the original credit agreement.
Select Automatic Payments
Select automatic payment options where your payment will be automatically deducted on a given date. This can mitigate the late payment issues and help you build a good score.
Get a Low-Limit Credit Card
If you are new to using a credit card, go for a low-limit credit card so that you can make small purchases using the card and pay off the credit balance in full without much burden. This practice can improve your credit score over time and ensure a good credit score in the long run.
Ask for Help
Take expert help from friends, family, and professionals to ensure that you establish good financial behavior.
It can take weeks, months, years for you to build a good credit score, but you must start at some point. Improving your credit score is a good aim to set for enhancing your financial health. Spend your time learning to be a responsible borrower and maintain a good score by sparingly using credit cards and loans.