Seven ways to raise your credit score

Most of us are unaware of our credit score until it is time to apply for a loan or credit card. If you are rejected because of a low score, not only do you fail to get credit, each rejection damages your credit score further, making it even more difficult to secure credit in the future. Increasingly, potential employers are accessing credit scores to get a quick idea of an individual’s financial responsibility. In the more developed credit economies in the West, landlords and utility companies can obtain your credit score to check if you have a good repayment history before deciding whether to do business with you and on what terms. Any time is a good time to start improving your score and the best time is now.

Banks typically look for a credit score of 750 or above when making lending decisions so your goal should be to reach that score. Keep in mind, however, that there is no instant, overnight remedy for increasing a poor score - it can take a few months to a year depending on your score. However, it is possible to make significant improvements to your credit score by following the tips listed below. 

1. Check your Credit Report right away: The first thing you should do in your quest to improve your score is to ask the credit bureau for a copy of your Credit Information Report (commonly referred to as a credit report). You can request for your report online on payment of a fee. Check your report for any reporting errors that might be unnecessarily dragging down your score (e.g. a loan you might have repaid in full but is still shown as overdue). Wrong credit entries could also be a sign of fraud. File a dispute resolution with the bureau to rectify the matter immediately. Removing any wrong entries on your report will help improve your credit score.

2. Make all your payments on time. This is the single most important thing you can do to improve your credit score. Up to one third of your credit score is determined by your repayment pattern and even a single late or missed payment can affect your score. Start paying all your EMIs and credit card bills on time and in full. This will have an immediate positive impact on your score. 

3. Set up payment reminders: This will help you avoid missing payment deadlines that can decrease your score. Since repayment history can account for up to 30% of your credit score, making timely payments will help your score. Your bank can send you a monthly email or SMS to remind you about the payment deadline. You can also arrange to have the monthly balance paid automatically from your bank account.

4. Limit spending to 50% of your credit limit: Ensure that you restrict your monthly spending to less than half of your credit card limit. When lenders see excessive spending (even if it is within the total limit) they assume that you lack spending discipline and might not be able to fulfil your loan obligations. If you have a high credit utilisation ratio (your actual credit usage as a proportion of total credit available to you), your credit score will suffer. So, for instance, if you have a credit limit of Rs 1 lakh, make sure that you do not spend more than Rs.50,000 on your card every month. 

5. Avoid multiple loan or credit card applications within a short time frame: In order to maximise your chance of securing a loan or credit card, you might be tempted to apply to several lenders at the same time, or to make further applications if you have been rejected by one lender. Making multiple applications affects your score, even if you were finally approved for a loan. Each application shows up as a query on your credit report and too many queries within a short period is a sign that you are ‘hungry’ for credit and need to apply to various sources. This has a negative impact on your credit score. 

6. Ask for a higher limit on your credit card: This will help increase your overall credit limit across cards and thus lower your average credit utilization ratio. Lenders would be willing to agree to an increase if - (a) you have a generally good track record of repayment, and (b) it has been some time since you last saw a hike in your limit. 

However, an increased limit can improve your score only if you are disciplined about your spending and keep credit card utilization to within 30% of this higher limit. There is no point in having a higher limit and increasing your spending – this will have a reverse effect and only cause your score to drop further.

7. Do not apply for any new cards or cancel old ones: Concentrate on improving your score with your existing cards. Getting a new card might give you a higher credit limit but you run the risk of not being able to make timely payments on the extra spending on the card. 

Similarly, do not give up any existing credit cards either because this will cause your overall credit limit to drop. Also, it will decrease the age of your accounts (the length of your credit history). This also has a negative impact on your score. Your immediate focus for improving your score should be to ensure full payment on your existing credit cards. 

It is possible to undertake all these steps on your own and see a positive effect on your score. All it needs is a certain amount of payment and spending discipline to see a significant improvement in your credit score.