A good credit score is an essential aspect of your financial life. Once you get a credit card or a loan you need to take care of how you manage your debt obligations. If you handle your financial responsibility well it will get reflected on your CIBIL report and help you build your CIBIL score. Good credit management is therefore very important. Here are some important tips that will help you in managing credit in the most effective way.
- The number one rule is to use credit card wisely and spend within your means. It is always better to save up before you buy something so that you can easily pay off the balance at the end of the month and avoid interest payments. If you go overboard then you will end up with huge debt levels that will become too difficult to handle.
- Budgeting is another important aspect of credit management. Identify your inflows and plan your outflows of loan payments and credit card bill payments. It will help you in paying your loans faster and keep you out of debt.
- Having an emergency fund saves you from a lot of worries when an unexpected expense comes up. If you have enough liquid cash to cover at least 4-6 months of living expenses then you will not have to borrow more than what you are comfortable repaying.
- Monitor your credit card account regularly. Reconcile the card statements every month and make sure that your records match. If you find any discrepancies report them immediately to the card company.
- Keep track of the amount of debt you are accumulating month after month. While you do need to charge a few expenses on the credit card each month in order to build a history of good credit behaviour, make sure you borrow only what you need. Your total outstanding balance on the card should not be more than 30% of your credit limit. If you max out your card you will have low cibil score and make it difficult for you to secure loans in future.
- You need to pay a minimum monthly balance on the credit card before the due date. But just paying the minimum amount will cost you a lot in the long run. It is better if you do not carry any balance at all and pay the entire outstanding amount at the end of the month. Since a very high rate of interest is charged on the credit card balance the debt can soon spiral out of control. It may then take a long time to pay off. When you carry low balances on your credit card you not only avoid interest but also improve your credit utilization rate and boost your credit score.
- Your repayment patterns have a strong impression on your credit profile. Timely payment of dues helps in establishing yourself as a credit worthy individual. Late or missed payments, foreclosure and collection accounts all get recorded in your credit report. These negative remarks stay on your report for years and affect your score negatively. Hence it is important to keep track of due dates of all your loan payments and credit card bills. Set alerts or schedule online payments to stay on top of the payment schedule. Another way to avoid the late payment trap is to set up a direct debit and have the money debited from your account automatically. Make sure that you have enough funds in the account from where direct debit takes place.
- Keep your contact information current. In case you change residence or phone number make sure that you get it updated so that you keep receiving your statements and alerts regularly.
- If you have a good record of payments on old credit card accounts then do not close them. Use them occasionally and keep them active as the length of the credit history contributes in increasing your credit score.
- Ask for a credit limit increase from your card company. But make sure you do not increase your debt load. This will help in improving your credit utilization ratio which is an important factor while calculating your credit score.
If you follow the above principles to manage your credit you will surely build an excellent credit history and have a good credit score. This will enable you to secure loans, especially personal loans when you want to and at favourable terms and rates.