Know more about credit score
The first step in maintaining a good credit score is to understand more about it. It is absolutely vital to figure out what constitutes a credit score and then ensure there are no slippages on those parameters. A credit score is comprised of various types of debt and your history of servicing them becomes the credit score. From a personal loan to an auto loan and even a loan that you may have taken in your personal capacity for your business will get reflected here. It is important to note that credit cards are forms of unsecured debt and also forms a vital part of your credit score.
Manage your debt
Your debt is central to the credit score and it is very important to manage it well. Every missed payment against your debt will create a negative impact on your credit score and hence debt management should be your first priority. Every kind of debt does not become a part of your credit score, so you need to be judicious on what becomes a priority.
For example, credit card debt is something that is a part of your credit score and delays and outstanding amounts do impact your score. On the other hand, payment to a vendor is not a part of your credit score and if you ever have to make a choice between what payments to make, paying your credit card due has to take precedence.
Pay bills on time
The cardinal rule of paying back debt is to do it in time. Every EMI for a loan, every credit card outstanding should be paid on time. Every bill that you miss paying on time, has an adverse impact on your credit score. If you run a small business, have a close watch on your cash flow and ensure that you have the money to pay of institutional credit. Structure your payments in such a way that you pay your debt that impacts your credit score first and then follow it up with other payments.
Similarly, when paying your credit card bill on time, remember that there are two components to it. One would be the minimum payment due and the other the total payment. Every time you make the minimum payment and not the total payment due on your credit, the outstanding amount plus any new transaction you make on your card will attract an interest rate. This also impacts your credit score.
Be rational about new credit
Approach new credit with caution. Be absolutely sure when and why you need to raise credit. Raising credit beyond what is needed is not prudent. It alters your debt to equity ratio, has needless interest charges attached to it and also every credit check that a lender makes against your request goes on to impact your credit score. Similarly, do not have too many credit cards just because you can apply for it. Every request for a credit card hits your credit score when the issuer asks a credit rating agency for your profile. Also, credit card debts are unsecured loans and it is not wise to have a big mix of this potential debt.
Close a credit card with care
While you should not go overboard in applying for new credit cards, you should be judicious when it comes to closing them, especially when you had the credit card for a long time. There may be times when you find the use of a particular credit card very limited and may want to close it.
However, an old credit card gives depth to your credit score as it provides a history of your financial transactions. In this case you may want to carry on with the credit card and in fact do a few small transactions once in while to keep things relevant.
Do not take cash from Credit cards
This is one common mistake that most of us do without thinking of the ripple effect it will have on our credit score. Taking cash out of credit cards is a costly affair as the banks charge far more in interest for withdrawing money from a credit card than they do for making purchases.
Apart from that, cash advances from credit cards can also signal the lenders of your desperate dealing with money which again in longer run can hamper your credit score.
Don’t exercise Debt Settlement option
Many a times people approach their respective lenders to cut down the size of the debt. Lenders can agree to reduce the loan amount or credit card dues to a certain extent. This process is called as debt settlement in ‘Credit’ terminology. Though you do get free from the debt burden by availing such an option, it signals your incapability to pay the debt in full. The lender, with whom you have entered into a debt settlement agreement, will convey this to the credit bureau. The bureau, in turn, will state in your credit report as debt settled, adversely affecting your score.
Don’t utilize too much credit
Utilization of credit can be much more with a credit card owing to its immense purchasing power. A higher credit utilization would raise the debt amount substantially and thus create a situation of possible default from the borrower’s end. This could lead to a reduction in your credit score. Therefore, it’s advisable to keep the credit utilization ratio to 30% of the limit offered. Maintaining this ratio would keep a lid on the debt and help you pay off the same without any hassle, thereby lifting your credit score.
Avoid making too many credit enquiries
People make too many credit enquiries while applying for a debt. This could bring down their score, particularly when the application gets rejected from the lender’s end. Making enquiries despite facing constant rejections can hamper your credit score.
The writer is, CEO, Wishfin.com.