When you applied for a home loan at the same bank where your colleague applied, he got a lower interest rate, while you were offered a higher rate. Even a 1% difference on a home loan of Rs 80 lakh can cost you a significant amount over a 30-year term. You asked your lender why this was happening, and they explained that your credit score is lower than your colleague’s, which is why you are getting a higher interest rate. Confused, you wonder what this means and how to improve it. Well, a credit score is a three-digit number that helps lenders determine how “creditworthy” you are. In other words, it indicates how likely they are to get their money back if they lend to you. Your credit score can heavily influence your loan terms, such as how much you will receive and how much you will pay on the money you owe. So, the better your credit score is, the better terms and lower rates you can secure for your loans. But achieving a good credit score can’t happen overnight. Just like staying in shape requires regular exercise, maintaining a good credit score requires good credit habits.
Like what you’re reading?
Get our latest, straight to your inbox.
Before we delve into the details of how to improve your credit score, let’s understand what a credit score is and who determines it.
What is a credit score?
Think of a credit score as a number that tells lenders how risky it is to lend you money or issue you credit. A credit score typically ranges from 300 to 850. Various factors, such as your payment history, credit mix, and utilisation, impact your score. Generally, the lower your credit score, the riskier you appear to lenders. Conversely, the higher your credit score, the safer it is for them to lend you money.
Is your credit score fixed, or can it vary?
Well, the answer is yes. Credit score ranges can vary based on which credit information company a lender is using, such as CIBIL, Experian, Equifax, or CRIF Highmark. The ratings typically include bad, average, good, and excellent. Banks or lenders typically use credit reports from one of the four major credit information companies. So, your credit score from CIBIL may differ from your credit score from Experian. Now that you have a basic understanding of credit scores, let’s see how to improve your credit score.
Never miss a due date for credit card bills, loan EMIs or Buy Now, Pay Later payments
The basic rule for maintaining a healthy credit score is to pay your bills on time, whether they are credit card dues, loan EMIs, or Buy Now, Pay Later options such as Simpl or LazyPay. Why is this crucial? Because your payment history—specifically, whether you have paid your past dues on time or not—is typically one of the most important factors affecting your credit score.
Keep in mind that your payment history, including on-time, late, or missed payments, will be reported to credit information companies. Even making a payment more than 30 days late can significantly harm your credit score and remain on your report for an extended period.
What you can do
- Set up autopay: With autopay, your payments will be automatically deducted from your bank account. This way, you won’t forget to pay your credit card dues or loan EMIs.
- Set reminders: If you’re not a fan of autopay, consider setting reminders for when your credit card bills or loan EMIs are due.
Credit utilisation rate: Are you using more credit than you should?
Are you swiping multiple credit cards simultaneously or carrying a huge credit card balance or loan that you haven’t paid off yet? If so, there’s a high chance your credit utilisation rate is elevated.
Credit utilisation rate is the percentage of your total available credit that you are using. Your monthly credit utilisation rate should be no more than 30% of your total credit limit. For example, you have two credit cards, each with a credit limit of Rs 10,000. You use Rs 10,000 from one card and Rs 5,000 from the other in a month. Your total available credit is Rs 20,000, while your total credit card outstanding balance for the month is Rs 15,000. So your credit utilisation rate is 75%.
Even if you consistently pay your credit card bill in full, a high utilisation rate due to low credit limits can still negatively impact your credit score.
What you can do
If you use multiple credit cards within a month, consider paying your bills shortly before your monthly statement is due. Alternatively, you can make multiple payments throughout the month to keep your balance low. If you have one or more high credit card balances, prioritise paying them off. If your credit limit is too low, consider asking for a higher limit after making on-time payments for 6–12 months.
Be careful when applying for a credit card or loan
When you apply for a new credit card or loan, the lender will generally conduct a “hard inquiry” into your credit. Frequent hard inquiries can negatively impact your credit score, and they remain on your credit report for a considerable amount of time.
What you can do
1) Think carefully before applying for a new credit card: Are you considering it because you genuinely need it, or is it simply because everyone else is getting one? If the answer is the latter, you may want to reconsider.
2) Avoid frequent hard inquiries: When you’re out shopping and the salesperson mentions financing options, such as no-cost EMIs from a different bank or financier they have a tie-up with, be cautious. The lender or issuer will also do a hard inquiry on your credit to approve your credit. Multiple hard inquiries will impact your credit score.
3) Use smart strategy for your next loan: If you’re loan shopping and trying to find the best interest rate for a new loan, aim to submit all your loan applications around the same time—ideally within a one-to two-week period—rather than spreading them out over several months.
If you are planning to take out a major loan soon, such as in the next few months, it is best to avoid hard inquiries altogether. Remember that checking your own credit is not considered a hard inquiry, so it won’t hurt your credit score.
4) Check credit report regularly and dispute any error you find: Inaccurate information on your credit report can significantly harm your credit score, especially if there are serious errors, such as a late payment or a high credit card balance. If you have been a victim of identity theft, there may be fraudulent accounts on your report that could negatively impact your credit score.
Conclusion
Review your credit report regularly, ideally at least once every quarter. Contrary to popular misconception, checking your own credit report does not lower your credit score. It’s easy and mostly free of charge. You can check your credit report using popular apps like Google Pay or Paytm. You can also visit the official websites of credit bureaus like CIBIL, Experian, Equifax, or CRIF High Mark.
When reviewing your reports, look for any details you don’t recognise. If you spot any mistakes, you can dispute those inaccuracies by contacting the credit bureaus to initiate an investigation. Credit disputes generally take about 30 days to resolve. If the credit bureau determines that your dispute is valid, it will correct or remove the negative information. While it may require some legwork, ensuring your credit history accurately reflects you as a borrower is worthwhile.
A good credit score is not only necessary but also essential for obtaining loans or credit on your terms.
Stick to these habits, and maintaining a good credit score may become second nature.
