Given the rising aspirations of Millennials and GenZ, buying the best products and enjoying the good things in life are taken for granted. In many cases, however, the salaries of these youths may be insufficient to meet their desires of buying or paying for these requirements right away or in cash.
In such scenarios, paying for products or services in instalments is the best alternative. But one can only be eligible for credit-linked products if he/she has a healthy credit score. It is only through a good credit score that a person can be eligible for loans at more reasonable interest rates.
Therefore, here are ten top tips to help one build and maintain a healthy credit score, which can open the doors to a better lifestyle:
Create credit history: This is the first step because without credit history it is difficult to avail of loans or purchase products via EMIs (equated monthly instalments). A person can create his/her credit history by applying either for a credit card or some small loan. Opting for a credit card can be relatively easy since banks reach out to salaried persons offering them this option. The other avenue is to apply for a gold loan since this does not require a credit score as an applicant can provide gold jewellery as collateral.
Shun multiple credit applications: Multiple credit requests within days or weeks could leave lenders wondering whether a person is facing some financial emergency, arising due to impulsive spending. Accordingly, it is sensible to apply for credit only to one lender at a time till a loan gets approved.
Always clear bills on time: A crucial element governing credit scores is payment history. Therefore, one should ensure that all payments – be it credit cards, utility bills or loans – are always paid on time. Besides attracting financial penalties, late payments will negatively impact an individual’s credit score.
Avoid high credit utilisation: The percentage of credit utilised from the overall amount available denotes one’s credit utilisation. Since high credit utilisation can imply financial stress and hurt one’s credit score, it is advisable to keep this under 30%.
Check the credit report periodically: A free copy of one’s credit report can be obtained from major credit bureaus once a year or from other financial entities at more frequent intervals. Periodic checks of one’s credit report are advisable so an individual is informed in time if the score is falling below the required mark.
For example, out of a maximum of 900, any score of 750 and above is generally deemed healthy. Moreover, periodic checks make sure that if there are errors or discrepancies in the report, these can be corrected in time.
Avoid the closure of old accounts: Closing an old bank account or credit card is not advisable since it shows the longstanding relationship between an individual and the lending institution while also highlighting one’s long and responsible repayment history. Closure of an old account or credit card negates the previous record, affecting the credit score.
Restrict new credit applications: Though a healthy credit blend is beneficial, opening new accounts frequently is counterproductive as every credit application triggers hard inquiries from lenders. This can lower the credit score briefly since it indicates one is credit hungry. In turn, the chances of the credit application being rejected rise. Consequently, one should apply for fresh credit only when it is necessary.
Vary the credit instruments: A varied combination of credit accounts in the form of loans, mortgages, and credit cards can help an individual’s credit score. Nonetheless, only choose credit that can be repaid responsibly without incurring an unnecessary debt burden.
Beware of becoming a co-signatory: Co-signing for someone else’s loan or credit card is risky since it makes the co-signatory partly responsible for repaying the debt if the need arises. For instance, if a primary borrower defaults on his/her repayment, not only is the co-signatory liable to repay the debt, but it can also impact the individual’s credit score. As a result, it is best to avoid or be very cautious about acting as a co-signatory.
Inculcate responsible financial behaviour: Whatever one’s situation, being financially responsible is always beneficial and also helps in maintaining a good credit score. Financial responsibility can be promoted by creating a monthly budget for all expenses, only spending within predetermined limits, and maintaining a lifestyle that is in sync with one’s salary.
If readers adhere to the above guidelines diligently, having a robust credit score won’t be challenging. Furthermore, it will be easier to save money that can come in handy during a rainy day or in the event of some financial or health emergency.
Gaurav Jalan, CEO & Founder, mPokket