5 ways to Build Credit Score – A Step by Step Guide
Looking for Personal loans but not getting approval?
Facing rejections on your Credit Card?
The ONLY PERSON WHO CAN IMPROVE YOUR SCORES OF CREDIT CARD IS YOU.
Credit Score building up doesn’t happen overnight- it takes several months or even years, and it also involves consistently practicing responsible credit behavior, which involves paying bills in time and limiting debts.
The things you’ll learn about in this post are as follows:
- What is a Credit Score?
- Information around Credit Score Ranges
- Factors Affecting the Credit Score
- Alternative Ways To Build Credit
- Monitoring Your Credit Score
You might be wondering what are the benefits of striving for good scores!
The fact is, higher credit scores enable you to be eligible for some vital privileges or perks which includes even a basic task of getting a resident application from landlords, obtaining lower interest rates for loans, and mortgages. The higher scores even provide the opportunities of qualifying for best credit cards at favorable terms that will ultimately save you money!
Be it a card issuer or even lenders, when it comes to financial credit products, each one will check your credit, they will glance at either the credit report and/or the credit score. There are various websites where you can check your credit score even before others- after all, it doesn’t hurt if you check first before a lender or credit card issuer does! In a nutshell, good credit is very crucial in unlocking various financial opportunities in life.
Indeed it takes a while to develop a strong credit history, but we’ve to start from somewhere- And that’s here at Fintra! Here we will review some credit score basics and reveal some credit building tips to increase credit score over time.
What is a Credit Score?
In India, Credit Score is primarily referred to as CIBIL Score which is also known as the TransUnion CIBIL score. There are other credit bureaus that provide this service, one of them is Experian, but CIBIL is the largest credit bureaus in India. The CIBIL Score is a 3-digit number ranging from 300 to 900, and this score summarizes an individual’s overall credit performance such as its history of credit repayments, the individual’s frequency of applying for credit cards, loans, past debts, residential. Hence, the higher the CIBIL score, close to 900, the better chances of you obtaining approval for new credit cards or loans in the near future.
Speaking about credit reports, these reports record your credit behaviour/history and it is generated by CIBIL, known as the CIBIL Report or CIR (Credit Information Report). This detailed document discloses the credit history, the repayment of all prior loans, and credit cards. Bear in mind that since the CIBIL report only focuses on the handling of credit instruments, your other financial instruments such as net worth (bank balance, investments, annual salary, business turnover, etc.) doesn’t impact how high or low one’s credit score will be.
Information around Credit Score Ranges
How is the CIBIL score calculated? The calculation is based on the individual’s credit behaviour and it is reflected in the ‘Accounts’ and ‘Enquiries’ section of your CIR. If the score is above 700, it is generally considered good. Coming on to the score ranges, as we said earlier, the CIBIL score ranges from 300 – 900, 900 being the highest. You’re generally considered to be a responsible borrower if your CIBIL score is 750 and above.
The different ranges of a CIBIL score are as stated below:
NA/NH: If there’s no credit history, the CIBIL score will be NA/NH, which means it is either “not applicable” or no history”. Please note that you won’t have a credit history if you have not used any credit card or taken a loan. However, you can consider taking credit, because sooner or later it will help in building a credit history and you’ll avail of access to various credit products.
350 – 549: In this range, the CIBIL score is considered to be bad. It reveals the fact that you have been paying the credit card bills or EMIs for loans very late. With such a CIBIL score in this range, it will be difficult to obtain a loan or even a credit card because you are portrayed to be at a high risk of turning into a defaulter.
550 – 649: Within this range, a CIBIL score is considered to be fair. However, since this is still not a preferred CIBIL score range, only a few lenders will consider offering you credit because this suggests you’re struggling to pay the dues on time. Moreover, even if you obtained a loan the interest rates might be on the higher side. Hence, serious measures you must be taken if you desire to improve your CIBIL score more so that you can have better deals on a loan.
650 – 749: If an individual’s CIBIL score is within this range, then they’re on the correct path. One must continue to display good credit behaviour and increase the score further. Lenders will now consider the credit application by you and offer a loan. Even though you’re within this range, you still don’t have the power of negotiating to get the best deal on the rate of interest for a loan.
750 – 900: Scores within this range is claimed to be excellent CIBIL score. It suggests the individual has been regular with their credit payments and has an impressive payment history. Banks will offer loans and credit cards without any hassles and will consider the person is at the lowest risk of turning into a defaulter.
Where is the information of scores and credit is stored? The information of everyone’s credit accounts is maintained and stored by the credit-reporting agencies, the credit bureaus. There are three largest credit bureaus, Equifax, Experian, and CIBIL TransUnion. These bureaus use the individual’s credit information to yield credit scores and whenever the lenders, creditors, and/or businesses desire to evaluate an applicant and their accounts, they purchase the data from the bureaus.
Factors Affecting the Credit Score
We are not only targeting those who have credit but we’re also trying to explain the newcomers as well. As a newcomer, some of these factors might not apply to you currently, but the fact remains they can positively or negatively affect your score- it all depends on your behaviour as a consumer. Hence, educating and gaining knowledge on credit now will certainly enable you to avoid costly mistakes in the near future.
Let’s find out what are the key factors that could affect your credit score:
- Paying bills on time (35%): Credit scores reward those who have a track record of paying bills/payments on time. A misstep here can be very costly, and late payments that are 30 days or more past the due dates continue to stay on your credit history for years. Hence, making payments in time and maintaining low balances are two vital factors when it comes to building good credit. Fintra suggests setting up autopay for payments, so you can avoid unnecessary mishaps. Another method you could use is to schedule email, text, or push notifications through your card issuer.
- How much you owe (30%): Credit utilization refers to the number of your balances relative to the total credit limits, and it is the second most vital after the payment history. It’s advised not to use more than 30% of your credit limits. The utilization greater than 30% might cause scores to decrease rapidly because it suggests the individual’s chances of turning into a defaulter is much high. Not to worry, there’s a good side, too, to this scenario- A high credit utilization will stop damaging your credit as soon as a lower one is reported to the credit bureaus. Moreover, there’re various steps you can take to lower credit utilization and improve your score.
- Credit age (15%): Credit age refers to the length of time you have had the credit, and the longer the length of credit history, it’ll be better for your score.
- Credit mix (10%): Credit mix refers to the variety of credit products you possess, such as credit cards, mortgage loans, instalment loans, finance company accounts, and so on. The more variety the more the scores get rewarded in value. As the saying goes, “Variety is the spice of life”!
- New Credit (10%): This refers to your acts of how often you’ve applied for and opened new. Like in life at times something more isn’t always good, the same rule applies in the world of building credit. Opening way too many accounts at once will portray you to be a risky person in the eyes of a lender; it’ll also harm the credit scores. Every time you are applying for credit, an inquiry appears on the credit report and this act can for a while lower your credit score, later on, in a few months, it’ll bounce back. One or two credit inquiries won’t much hurt your scores, however, the effect adds up if you are frequently applying for multiple cards within a short span of time. Fintra advises if at all you desire to have more than one or two credit cards, then consider doing so over a period of time instead of repeatedly applying within the same month. Generally, it’s not a wise act of applying for several cards at once.
Alternative Ways To Build Credit
We’ll now reveal some alternative ways to build credit. These methods could be useful to the newcomers who desire to enter the world of credits and scores. Be delighted to note that credit cards aren’t the only mediums used for building credit, there are other ways too. Even if you don’t have a credit card due to noncredit history, no problem, there are ways to get through!
Fintra hereby presents some of the alternative ways to build credit:
- Apply for a secured/unsecured credit card: Although one of the best tools for building credit is credit cards, it might be trouble to qualify for them when there’s no credit history. Hang in there, don’t get disheartened as there’s a way to bypass this! Fortunately, in the world of credit cards, there are few card options for those who have little or no credit.
The first option is Unsecured Credit Cards- Consider getting these cards if you can’t afford to make a security deposit. Such credit cards provide a process in which you’re presented with a credit line on the basis of your creditworthiness before you can. However, to get approved for some of these cards, sometimes you might need to have at least some fair credit history.
The second option is to get Secured Credit Cards- These cards require upfront security deposits. This deposit will be equal to the initial credit limit. For example, with an Rs. 500 security deposit, you’ll get an Rs. 500 credit limit. It’s easy to qualify for them, they can be used to make purchases like the traditional credit cards, and it’ll also establish some credit history.
- Become an Authorized User: If you know anyone willing to add you as an authorized user on their credit card account, you can piggyback off their credit card activities and establish yours. By doing this, you’re at a relatively low-risk because you’re not entirely responsible for bill payments. The account will still appear on your credit report and potentially have a positive impact on your score. However, first, make sure the primary account holder has good credit!
- Get credit for paying eligible bills: If you desire not to dive into credit cards, then another way to get credit is by paying monthly utility and cell phone bills on time.
- Get a Loan: Getting a loan just for building a credit score is of course not a wise idea, but if there’s a valid reason like needing funds for college or a car, a small loan in your name can enable you to build credit. Just like credit cards, loans will build a good credit history only if you pay them on time. As you are paying off loans do ensure your creditor is reporting the payments to the credit bureau. In fact, having a credit card and obtaining a loan can act as a feather in your cap- it’ll help improve your account mix.
Monitoring Your Credit Score
Excited to dive into the world of building credit scores, especially the newcomers, however, hold your horses! Don’t fall into the trap of debts, watch out! The more you take in credit cards and loans, then you’re placing yourself in the hot spot of debts. If you’re just stepping into this aspect of the world, then we suggest to play it safe- tackle one basic credit card and/or small loan well until you master the vital aspects of it. Moreover, as you’re figuring out how to build your credit, it’s advised to do it gradually, carefully, and do keep a constant eye on your statements and credit reports! Try not to drawn into the whirlpool!
The same advice goes to those who’re already into it. It’s vital to realize where you stand by monitoring your scores. Various personal finance websites help to assist you in getting free credit score reports. Keep in mind to use the same score every time you check, because doing otherwise will be like trying to monitor your weight on varied scales! Hence, select a score and make a masterplan to monitor your credit.
Conclusion
Wrapping up everything now, if you want your credit score to shine as bright as the sun then practice healthy credit habits such as: using credit lightly, paying your dues on time, applying for credit sparingly, before closing an account think twice, and consider obtaining a credit card only if you have instalment loans or vice versa. Bear in mind, just like our weights, our scores fluctuate, too! Scores are snapshots, so the numbers may vary every time you’re checking them, but as long as you’re keeping them within a healthy range, the variations won’t much impact on your financial well-being.
