Financial Foundations: Achieving and Maintaining Good Credit Scores

When an individual applies for a loan, lenders do a proper background check before taking a call on whether or not to extend a loan to the borrower. They check the loan applicant's income, age, debt-to-income ratio, etc. However, one of the first things that lenders check about a loan applicant is their credit score. 

The credit score is a three-digit number that ranges from 300 to 900. It is reflective of a person's attitude towards credit and their creditworthiness. A high credit score is the mark of a borrower who can be completely trusted with timely repayment of loan EMIs. A low credit score, on the other hand, is the mark of a borrower whose creditworthiness and repayment capacity are dubitable. 

Credit users in India must maintain a credit score above 750. Such a credit score is sufficient to convince lenders to lend money to a borrower on the most beneficial loan terms and conditions. The question is what can a credit user do to build and maintain a credit score above 750? Read on to know. 

Tips on How to Achieve and Maintain Good Credit Scores

1. An individual's repayment history is responsible for over 35% of their credit score. A clean repayment history with no instances of missed EMI payments and credit card due dates and no cases of loan default will automatically lead to a good credit score. To build and maintain a good credit score, the first thing that a credit user must do is make sure they are not missing any payment due dates. Authorizing your bank to make autopayments may make things easier for you. 

2. Maintaining one's credit utilization ratio under 30% helps too. The credit utilization ratio is the ratio of credit used to the total credit available. A high credit utilization ratio indicates a high dependency on credit and therefore, a high credit utilization ratio leads to a low credit score. To maintain a good credit score, keep your credit utilization ratio under 30%. Paying the entire amount due on your credit card and using your credit card judiciously will help. 

3. When an individual applies for a loan, the first thing that a lender does is approach a credit information agency to enquire about their credit score. This registers as a hard enquiry. Too many hard enquiries are seen as a sign of excessive dependency on credit and therefore, individuals with too many hard enquiries under their name have a low credit score. To build a strong credit score, you must make sure to spread out your credit card and loan applications and not be excessively dependent on credit. 

4. Individuals who have a healthy mix of both secured and unsecured loans have a higher credit score. Therefore, all credit users must try and make sure they have both secured and unsecured loans. 

5. Lastly, the age of your credit history also impacts one's credit score. The older your credit history, the better will be your credit score. So, never close old loan accounts and credit cards. Closing these accounts and credit cards will delete your credit history, causing your credit score to go down. 

Building and maintaining a good credit score is quite easy. All one must do is develop an understanding of the factors that affect an individual's credit score and take measures accordingly.