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Credit Score Improvement: Tips and Advice

Credit Score Improvement: Tips and Advice

finance
August 17, 2022
5 min read
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Credit Score Improvement: Tips and Advice
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Improving your credit score is one of the basic financial activities that one should keep in mind. Credit card companies, banks, lenders, NBFCs, and financial institutions assess the credit score of consumers when they apply for a loan. If you want to improve your credit score, we have some tips, tricks and advice for you in this article. 

A lot of people have low credit scores and face difficulties to increase their score due to lack of knowledge. New credit users need to be aware that their credit score is regarded as the foundation of their financial stability. The average person must have heard a lot about the credit scores, but they probably don't know what it means or how important it is. In this article, we will talk about what is a credit score and important advice on improving your credit score. 

Credit score: Definition

A credit score is a three digit number assigned to every individual based on their credit history. This number doesn’t stay the same all the time; it keeps changing depending on your financial activities. Here’s a credit score advice – your score will vary from credit bureau to credit bureau as different credit bureaus use different algorithms to calculate your credit score. If you find different credit score from different credit reference agencies, there is nothing to worry about. 

How is a credit score calculated?

Although different credit agencies use different algorithms to calculate your credit score, there are a few common elements that are always taken into consideration by all the credit bureaus. 

Listed below are six (6) common elements that are considered for your credit score calculation:

  1. Repayment history
    The most important aspect in calculating your credit score is typically your payment history, or how frequently you pay your obligations on time. Late or missed payments can have a large overall influence on your score because they are such a crucial component.
  2. Mix of credit types
    Having different types of credit accounts, such as credit cards, education loans, and home loans, are referred to as a credit mix. Maintaining diversity might give lenders the impression that you understand the foundations of credit in addition to having a strong payment history. 
  3. Credit utilisation rate
    Your credit utilisation rate is calculated by dividing the amount of credit you are utilising by the total amount of credit available in all of your accounts. A credit usage rate of 30 percent or less is frequently preferred by lenders. Lenders may view having accessible credit as a favourable indicator because it shows that you only use the credit that you actually need.
  4. Age of your credit accounts
    In general, lenders prefer to see established credit accounts. This means that even if you no longer use your old credit accounts, you should keep them open because closing them may result in a shorter credit history overall. Having a long credit history builds reliability in lenders. 
  5. Amount of debt you have
    The total of your balances across all of your lines of credit determines how much you owe at any given time. If you can, try to pay off all of your outstanding debts each month. By doing this, you can keep your debt from growing and prove to creditors that you can make your payments on time. 
  6. Hard credit checks
    When you ask for a new line of credit, a lender or creditor will run a hard inquiry to assess your credit report. Frequent hard inquiries will lower your credit score and could give lenders the impression that you are trying to borrow more money than you can afford to repay.

Advice and tips to improve credit score

Your chances of getting a loan or credit card increases with a high credit score, and decreases with a low score. Because lenders and banks do not trust persons with low credit scores. To avoid getting your loan or credit card application rejected, here are some advices on how to improve your credit score:

  1. Review your credit report regularly
    Checking your credit report is one of the crucial things you must do to increase your credit score. This will help you in finding mistakes in your report. If you find any error in your report, you must have them fixed right away. It is crucial for you to verify that your report is error-free.
  2. Repay your debts on time
    Even if your credit score is high, you still need to be especially careful and quick about paying off your credit card payments on time in order to avoid having any significant defaults appear on your credit report.
  3. Keep your credit utilisation ratio low
    One of the best credit score advice is to keep your credit usage rate at or below 30%. A credit limit increase request to your credit card issuer will help you lower your utilisation rate in addition to cutting back on your spending.
  4. Limit new credit card applications
    A hard inquiry normally results in applying for new lines of credit can harm your credit score. So, try to limit the number of loan or credit card applications if you want to improve your credit score. 

Improving your credit score depends on a variety of factors. However, once you start taking steps to improve it, do not anticipate seeing the change overnight. 

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FAQs related to credit score advice

What are the 3 things you can do to improve your credit score?

There are various things you can do to improve your credit score. However, 3 first things you can do for increasing your credit score is to repay the debts on time and in full, keep your debt utilisation ratio below 30%, and review your credit report regularly to identify the errors in it and get it fixed. 

Can your credit score increase by 50 points in a month?

Some people may witness an improvement of 100 points in their credit score in 30 days. Increasing a credit score by 50 points in a month is not impossible, however, everything depends on your credit score. 

How long does it take to improve your credit score?

Improving your credit score will take time. It is always advised to wait patiently for your credit score to increase when you are working on it. The time taken to improve your credit score depends on your financial activities. 

What is a good credit score to buy a house?

A credit score of at least 620 is needed for a home loan if you have a collateral to offer against the loan. If you have a credit score of 750 or more, you will be getting home loans at lower interest rates. With a low credit score, lenders and banks will offer you loans at high interest rates.