13-Jun-2018 written by : FSI-Team
When people find out that their credit score is poor, they often freak out. However, they can't be blamed really because there are a lot of misconceptions about credit such as you can’t improve it once the damage is done, or that it's really challenging, etc. The thing is- none of this is true.
Not only poor credit can be improved, it can be improved easily if you know the right steps. These are:
One of the most important things you must do when you want to improve your score is to check the credit report every month or so. This is because unless you monitor your score on a regular basis, you can't devise a strategy to restore your creditworthiness.
Checking your credit report also helps in the identification of identity thefts and other kinds of frauds through unfamiliar transactions or accounts mentioned in the report.
High credit utilization is one of the biggest reasons behind poor credit score. So, if you use credit cards for every small and big purchase, then it can help to prefer cash as much as possible.
Ideally, the credit utilization should be below 30%. So, if your credit card limit is Rs. 1 lakh, then your monthly bill should not exceed Rs. 30,000. However, don't stop using credit cards altogether as moderate usage is actually good for the score.
When you don't manage your budget properly or when your monthly expenses are higher than your total income, then it can pose a big threat to your credit score. This is because in this kind of situation, you may end up maxing out your credit card, and your EMIs may also get delayed, both of which are extremely detrimental towards your creditworthiness.
To ensure that efforts don't go in vain, it's important that you work on your personal finance management. For starters, create a fixed monthly budget and calculate all your expenses including your EMIs and credit card payments. If the difference between your income and the expenses is small, then maybe you can down on some luxuries such as dining outside or watching a movie every week, etc. These small changes in your routine habits can greatly improve credit score.
If you are repaying multiple loans, then it's really important that you assign a priority to each. For instance, you may want to clear the biggest debt first. This is because the longer is a loan’s term, the more interest you have to pay. Plus, the term length is also longer. That said, if there is a small loan whose balance amount is small, then maybe you can repay it first and then move to the bigger debt so that you have one less loan to worry about.
When your debt is easily manageable, then the odds of you defaulting are low. This means that your credit score is easily protected too.
The way you repay your loans can have a huge impact on your credit report. This is because even though many banks offer a grace period of 30 days for late payments, your score is hurt every time you are late even if no penalty is levied.
If you can develop a habit of paying every EMIs before the deadline, then you can improve your score faster. This is because punctuality and consistency in your payments create a good impression that converts into a high score.
By just changing your day-to-day habits and activities you can improve personal finance management and attain a high creditworthiness easily. In that regard, the tips given above can be of great help. Good luck!