How to build a strong credit score? Here are 5 smart ways

A credit score is a numerical representation of a person’s creditworthiness, usually between 300 and 900. Your credit score is a tool used by banks and other financial organizations to assess your creditworthiness and ability to make loan repayments on time.

So, if you’re looking to buy a new home, apply for a new credit card or buy the latest gadget on the go EMIsyour credit score will determine whether or not you are eligible to purchase any of these loan products.

Some organizations also sometimes use credit scores as part of their employment checks to understand the financial behavior of a new employee. Now that we understand the basics, let’s understand the importance of a good credit score and how to maintain it.

Why is your credit score so important?

A healthy credit score can open multiple doors for you when it comes to credit products. A strong credit score is a financial asset and will open up countless opportunities. As a gatekeeping criterion for lenders, your credit score has a significant impact on your eligibility for loans and demonstrates your financial discipline. A strong credit history and consistent track record are the most important factors that determine your credit score, and ideally it should be above 720. A higher credit score means a lower level of risk to lenders and translates into better terms for borrowers.

How to build a strong credit score?

Establishing a strong credit foundation: For those just starting out, or rebuilding their credit history, establishing a strong foundation is essential. Consider getting a credit card or a small loan. Secured credit cards, where you provide a deposit as collateral, can be an excellent starting point. Make sure you make timely payments and keep your utilization below 40% to demonstrate responsible credit management.

Clear your EMIs on time: Timely payment of Balanced Monthly Installments (EMI) is crucial to building and maintaining a good credit score. Any delay or default in EMI payments is reported to the credit bureaus, which has a negative impact on your credit score. Paying your EMIs consistently on time reflects positively on your credit report and improves your credit score significantly over time. Avoid defaulting on any EMI payments, as this will damage your credit score.

Managing income and expenses: Managing your income-to-expense ratio is another critical aspect of maintaining a healthy credit score. It is essential to strike a balance between having enough liquidity to cover your monthly expenses and your savings after deducting EMIs from your monthly income. This is especially true for credit cards. One can be a little frivolous with credit card spending, but that is one debt trap you should avoid. Review your credit card balances regularly and work towards paying them down to improve your credit utilization ratio.

Create an emergency fund: Creating the emergency fund it acts as a financial safety net. In the event of unforeseen circumstances delaying IEA payments, an emergency fund can be saved. This fund can be used to settle any delayed EMIs promptly, preventing any negative impact on your credit score. In addition, it provides a buffer to manage unexpected expenses without resorting to credit, thus ensuring financial stability.

In the event of EMI delays, quick action is critical. Using your emergency fund or rescheduling non-critical expenses to create an additional buffer for timely payments can ease the impact on your credit score. Proactive financial management is key to protecting and improving your creditworthiness.

Avoid applying for new credit: A hard inquiry is made on your credit report every time you apply for new credit, which affects your score. Although it is common to seek credit for various needs, choose carefully when and how often to apply. Applying for credit infrequently and only when necessary can reduce the impact on your credit score.

In conclusion, building a strong credit score is a strategic and disciplined process that pays off in the long run. By understanding the importance of credit scores and adopting prudent financial practices, people can pave the way for better credit opportunities, favorable terms and financial security. The journey to a strong credit score isn’t just about numbers; it’s about cultivating a financial mindset that sets the stage for a stable and prosperous financial future.

1. Start with a small ticket, personal loan or credit card. If the bureau has no scores or a low score, a bank may provide the credit product against a deposit

2. Make sure that the EMIs are always paid on time

3. The lenders report any delay or default in the IMIs to the credit bureaus, which will have a negative impact on the bureau’s score.

4. Always make sure you manage your leverage to income ratio very carefully. You should have sufficient liquidity to manage your monthly expenditure, savings after deducting your IMIs from your monthly income.

5. Avoid debt trap and manage your expenses. Keep your credit card spending not too high compared to your total credit card limits.

6. Create an emergency fund to manage any unforeseen circumstances.

7. If for any reason your EMI is delayed, try to pay the same amount immediately using your emergency fund or delay some of your non-critical expenses to create an additional buffer for the IMIs they are delayed in paying back.

Review your bureau reports every six months, and learn how to revise the report. Any discrepancies in the report escalate to incorrect reporting immediately to the credit bureau.

Yogi Sadana, founder of Zype

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Updated: 20 November 2023, 08:57 AM IST