With the Monetary Policy Committee (MPC) deciding to hold up the key policy rates, many people are now hoping for the interest rates to come down. This also means renewed interest for loans and borrowing on credit. However, the credit-crazy and credit-dependent generation continues to ignore the importance of maintaining a healthy credit profile.
Bank Bazaar plans a weeklong credit score awareness program to enhance financial literacy. Details here
What does your credit report say? Have you taken too many loans on your credit card? Are you repaying your debt on time? What is your credit utilization ratio? You cannot decide and strengthen your credit profile without having answered these basic questions.
Your credit profile depends on your credit score. Banks and financial institutions do not rely on face value. Financial institutions evaluate the specifics of your credit accounts, including information about credit cards, loans, and other credit facilities, when you apply for a loan or a credit card. They carefully examine your repayment history, noting any instances of defaults or late payments documented in your credit report.
However, how many people are aware of their credit score? Or, rather how many check their credit score regularly? Bank Bazaar recently carried out a survey on LinkedIn asking their followers the following question “How often do you check your credit score?” while giving the following options.
- Once a month
- A few times a year
- Once a year
The online loans, cards, and investment aggregator then posed another question “Which type of credit inquiry can potentially have a negative impact on your credit score?”. The response to the survey underlined a huge gap in financial literacy in India.
- Roughly 19% of the respondents answered how “Checking your own credit score” could potentially harm their credit scores.
- Around 50% of the survey respondents feel that “Lenders checking your score” would affect their credit scores in the negative.
- Nearly 31% of the participants believe that both the aforementioned conditions could harm their credit score in the long run.
The fact that most people are clueless about credit score and what it entails is a chilling reminder of India’s financial illiteracy problem.
Delving into the same, Adhil Shetty, CEO, BankBazaar.com says, “Credit score is one of the deciding factors when it comes to accessing credit. Not only does it set a minimum benchmark for accessing credit, but it also determines how cheaply you get it. So, financial prudence and discipline, as underscored by the credit history and score, play a critical role in our ability to fulfil our material aspirations.
Given the importance of the credit score in a person's financial journey, we believe it is essential that people understand how it works and how one can make it work for them. With this in mind, we have planned a weeklong credit score awareness program, from June 12 to June 18, 2023, where we are attempting to dispel misconceptions around credit scores and encourage people to check their credit scores regularly so that they understand their financial health better.”
Though one may argue that banks and lending institutions do not tweak interest rates, inclined borrowers must realize how these financial institutions use your credit report to assess the interest rates on your loan. Understanding your credit eligibility becomes crucial. It then boils down to the state and quality of your credit profile.
Did you know that your credit profile depends on your credit report? Now, let’s see how to correct that credit report gone wrong with all your cards and loans sought to pay for your purchases. The foremost action you must take is to ensure credit discipline, which is possible by taking corrective actions against all credit left unpaid. The following simple measures will go a long way in improving your credit profile, thus, enabling you to seek loans (home, vehicle, or personal) in the future.
Timely bill payment
It is important to remember how paying your credit card bills, loan payments, and other financial commitments on time is essential. This is because late payments can harm your credit score. To preserve a healthy credit profile and prevent potential penalties such as increased interest rates, reduced credit prospects, or problems getting loans in the future, it is critical to prioritize regular payments. This way, you display responsible financial behaviour and contribute to a positive credit history by meeting your financial responsibilities on time.
Do not rely too much on credit
How much you buy or live on credit matters. Credit utilization is how much part of the available credit you are currently using. Financial experts advise credit utilization below 30 per cent of the authorized credit limit. Low credit utilization implies efficient credit management and financial soundness. High utilization, on the other hand, can signal financial hardship and therefore harm your credit score. You can help maintain a good credit profile and improve your overall creditworthiness by keeping your credit utilization within a certain limit.
Check your credit report
You must regularly review your credit report to identify any errors or inaccuracies that might have a detrimental effect on your credit profile. You can always obtain a free copy of your credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once a year. By reviewing your credit report, you can confirm that all of the information is proper, fix any problems as soon as possible, and keep your credit history accurate. Monitoring your credit report keeps you informed about your financial situation and helps you to take the required steps to protect your creditworthiness.
Credit mix diversification helps
Maintaining a healthy mix of credit accounts, such as credit cards, loans, and a mortgage, will help your credit score. It indicates your capacity to safely manage numerous sorts of credit. However, it is critical to proceed with prudence and avoid incurring excessive debt or opening unneeded accounts.
While having a wide credit mix might be advantageous, it is critical to borrow within your means and only take on debt that you can manage and repay comfortably. Opening multiple credit accounts in a short period of time, as well as accruing excessive debt, may raise concerns about your financial health and have a negative impact on your credit score.
It's critical to establish a balance between your borrowing demands and maintaining a tolerable level of debt. You may maintain a strong credit record and demonstrate financial prudence to lenders and creditors by utilizing credit wisely and avoiding excessive borrowing.
Limit credit applications
When you apply for many credit accounts in a short period of time, lenders may become concerned and your credit score may suffer as a result. This is due to the fact that frequent credit queries in a short period of time may indicate financial instability or urgent demand for financing.
Apply for credit only when you truly need it to preserve a healthy credit profile. Take the time to evaluate your financial status and determine whether further credit is required. Rather than being a regular or spontaneous action, applying for credit should be a conscious and thoughtful decision.
You can reduce the number of queries on your credit report and help preserve your credit score by being selective and smart in your credit applications. It's vital to remember that each credit application has a temporary influence on your creditworthiness, so apply for credit sparingly and cautiously.
Rework your credit limit
Have you sought too many loans or utilized too much credit in the past? Are you unable to repay your debt? Do you find your credit sources too scattered like the use of innumerable credit cards or too many loans from myriad sources? Prepare to bargain with your creditors in order to reach a mutually acceptable arrangement. Depending on the type of debt and its regulations, you may also choose from particular choices such as forbearance, deferment, or debt consolidation.
Maintaining a healthy credit profile not only increases your borrowing potential but also lays the groundwork for your financial future. To reap the benefits of a positive credit profile, it is critical to establish excellent credit habits early on and constantly maintain them.
personal financeManik Kumar Malakar
personal financeAnushka Trivedi
personal financeTeam MintGenie
personal financeTeam MintGenie
personal financeAbeer Ray
personal financeAbeer Ray