How to Improve Your Credit Score Quickly and Effectively

For instance, you go to a bank to apply for your dream home loan or a high-end credit card, and you are rejected on the basis of a "low score." This is a frustrating feeling, and many have had this experience. Your credit score is your financial "report card." Your credit score reflects how much you are trusted with other people’s money.

Your high credit score can help you get lower interest rates on loans, while a low score can make even simple financial aspirations seem impossible. But do not worry if you are in the second group. Although you may not be able to improve your credit score in a short period, you can definitely improve your credit score results in a few months with a disciplined approach.

What is a Credit Score?

A simple definition of a credit score would be that it is represented by a three-digit number that defines if you’re a good credit risk. The most popular credit score in India is CIBIL, but some other agencies also provide credit scores; e.g., Experian and Equifax.

Your credit history is based upon how well you pay back loans, your use of credit cards, and how well you keep up with monthly bills. The credit score uses a 300-900 scale. This helps lenders to estimate how likely you are to be a reliable debtor.

What is Considered a Good Credit Score?

The criteria for evaluating a credit score vary between lenders. Getting to know where you presently are in relation to a lender's criteria will be the first step to improving your score.

750-900 (Excellent): Generally, borrowers with a credit score of this range are considered "preferred" borrowers and will typically receive very competitive interest rates and near instant approval.
700-749 (Good): The credit scores in this range can be categorized as "good." In this range there are many lenders that will be willing to do business with you, however, not all lenders will provide you with the lowest possible interest rates.
600-699 (Fair): These borrowers are viewed as being moderate risk therefore, obtaining additional documentation from you may be required or your interest rates are likely to be higher than those borrowed in the 700-749 range.
600-or-below (Poor): Getting a loan with a credit score of this type would be extremely difficult. You may have to find somebody willing to be your co-signer or obtain a "secured product" to obtain funds.

Check Out: What is the Best CIBIL Score for Credit?

Factors That Affect Your Credit Score

It’s important to know what affects your credit score to improve it effectively.

Payment History (35%): Will you pay on time? Skipping one minimum EMI or payment could easily lead you to have a considerable loss in your score.
Credit Utilization Ratio (30%): The total credit limit you can actually use at one time.
Length Of Credit History (15%): How old are your accounts and therefore years as a borrower? An old account is usually an indication of more stability.
Credit Mix (10%): There’s a good mix of “secured” and “unsecured” loans on your credit report.
New Inquiries (10%): The application for multiple loans creates numerous “hard inquiries”, which will result in a temporary decrease in your score.

How to Improve Your Credit Score Quickly and Effectively

If you want to know how you can improve credit scores quickly for a loan, these steps can help you achieve it:

1. Pay Every Single Bill on Time

This is the "golden rule" of credit. It’s a no-brainer to start with paying your EMIs and credit card bills on time. If you’re finding it difficult to pay the entire amount for a credit card, at least pay the "Minimum Amount Due" before the deadline to avoid being marked as a defaulter.

2. Narrow your credit utilization

A good way of increasing your credit score is by keeping your credit utilization ratio below 30%. For example, we can say that “If your total credit card is Rs. 1,00,000, then do not spend more than Rs. 30,000.”If you utilize 80% of your credit line, you need to reduce the outstanding balance immediately in order to get a better credit rating in the next billing cycle.

3. Don’t Close Old Credit Cards

Closing unused credit accounts may seem like a good way to "clean up" your financial act, but it is really a bad thing. Closing accounts reduces your total available credit and also reduces your credit history. Keep these accounts open with a small purchase now and then.

4. Avoid "Credit Hunger"

Each time you apply for a new credit card, you are allowing a company to look at your credit report. If you apply for five new cards in one week, you are viewed as someone who is desperate for money. Space out your applications at least six months apart.

5. Opt for a longer tenure of the loan

If you're having problems with your EMIs, then it's better to opt for a longer tenure of the loan. This way, you'll never miss an EMI, and it's better to do so than to try to pay off the loan as early as possible but fail to do so.

Read More: Paying GST with Credit Cards

Common Mistakes That Lower Your Credit Score

It's just as important to avoid the mistakes below as it is to follow the above-mentioned tips:

Settling a Loan: If you settle your loan by paying less than what's actually owed, the bank will put a notation on your report that the loan was "Settled" rather than "Closed."
Being a Co-signer for a Defaulter: If your friend takes a loan and then defaults on it, your credit score will suffer just as badly as theirs.
Withdrawing Cash from Credit Cards: If you withdraw cash from your credit cards, then the credit bureaus view this as a sign of poor cash management by you, which will reflect poorly on you as well.

How to Maintain a Healthy Credit Score

It is generally easier to maintain a credit score than it is to rebuild one. To help with this, you might want to try the 2-2-2 rule where you:

Do not go over 20% of your limit
Pay at least 2 days in advance of your due date
Only have 2 hard inquiries in 6 months

To get additional information, also check out: How to Improve Cash Flow

Conclusion

In today’s financial system, your credit score is your reputation. Knowing how to improve your credit score effectively is not only about getting a loan, it’s also about taking control of your financial life. With discipline in paying your bills on time, keeping your card balance low, and keeping an eye on your report for any discrepancies, your "poor" credit score will soon be an "excellent" one.

So, take that first step today and settle that outstanding balance or set up an auto-pay mandate. Your future self, who will be enjoying all the perks of lower interest rates, will surely thank you!

FAQs

1. How much time does it take to see an increase in my credit score?

There is no instant solution for this, but a credit score increase is possible within 3-6 months with regular on-time payments and lower credit utilization.

2. Does checking my credit score lower my credit score?

No. Checking your own credit score is a soft inquiry, which does not lower your credit score. Only hard inquiries by banks when you apply for credit lower your credit score.

3. Does having no credit history mean I have a good credit score?

No. In fact, no credit history means your credit score will be "NH" (No History) or "-1." This is risky because lenders will not know your behavior. Getting a secured credit card against a Fixed Deposit is a great way to start.

4. Will my credit score increase if I pay off all debt at once?

Yes. Paying off your total debt will increase your credit score. This is because your credit utilization will reduce, which is a powerful factor that affects your credit score.

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