Cultivating a healthy credit score: Essential tips for Indians
A healthy credit score is crucial for financial stability and access to loans in India. It reflects your creditworthiness and impacts your ability to borrow money. Understanding how to maintain or improve your credit score can save you from high interest rates and loan rejections. This article provides practical tips to help Indians cultivate a robust credit score.
Pay your bills on time
Making timely payments on bills is crucial for maintaining a good credit score. Late payments, over 30 days late, can significantly damage your score. To prevent missed deadlines, set up reminders or automatic payments for credit card bills, loans, and utility bills. Even payments a few days late may harm your score if reported to credit bureaus.
Maintain low credit utilization ratio
Your credit utilization ratio, the percentage of your available revolving credit that is in use, should ideally be below 30%. A high ratio indicates an over-reliance on credit, which can lower your score. If your total credit limit across all cards is ₹100,000, aim to use less than ₹30,000. Monitoring this ratio and paying down balances can help improve your score effectively.
Limit new credit applications
Every time you apply for new credit, it results in a hard inquiry on your report. This can temporarily lower your score by a few points. Applying for several new lines of credit within a short period can make lenders perceive you as a higher risk. It's wise to spread out applications for new credit over time. And only apply when necessary.
Diversify your credit mix
Having different types of accounts — such as credit cards, car loans, and personal loans — on your report shows lenders that you can manage various types of debt responsibly. While it's not advisable to take out loans just to diversify your portfolio, having a natural mix over time contributes positively. This approach helps in building a healthy credit score.
Regularly monitor your credit report
Mistakes in reporting occur more often than one might think, and they could unjustly lower your score. By regularly checking your report from major bureaus in India (CIBIL(tm), Equifax(r), Experian(r)), you ensure accuracy. You also have the opportunity to dispute any inaccuracies promptly. Doing so before they impact loan approvals or interest rates offered by lenders is crucial.
