BUILDING AND MAINTAINING GOOD CREDIT SCORE

Introduction : In todays’ financial world credit score plays a significant role to get a loan  , even to get certain jobs. Maintain good credit score is essential for financial well being.

In this blog I will discuss some practical tips for establishing and sustaining a healthy credit score.

What is credit ?

Credit is essential a way for lenders to identify how reliable you are for borrowing money.  Credit score typically ranging between 300 to 850. Higher credit score make yourself more trustworthy before lenders which can lead to better interest rates and loan amount.

Credit Scores :

Credit score is calculated based on five factors as mentioned below :

1.  Payment History (35%) : This is one of the most important factor to calculate credit score . non payment or delay payment can make negative impact on your credit score.

2.  Credit Utilization (30%) : It is refers to the amount of available credit you are using. You should try to use less than 30% of your total credit limit.

3.  Length of credit history (15%) : Longer credit history better for you. It shows lender that you have experience to manage your credit.

4.  Credit Mix (10%)  : Having variety of credit account (for example credit card , mortgage loan etc.) can improve your credit score.

5.  New credit inquiries (10%) : Applying too much credit within a short period may hurt your credit score because it shows to the lenders that you are in a financial trouble.

Steps to build good credit :

1.  Start with a  credit card : If you have no credit history , a credit card is a good option to start. Spending small and paying them off on time make positive effect in your credit score.

2.  Become an authorized user :  Another option is you can become a authorized user of someone else’s credit card , such as a family member’s account . you should be benefited from their positive payment history and it makes positive impact on your credit score.

3.  Keep credit utilization low : Try to avoid maxing your credit cards . A good thumb rule is try to use 30% of your total credit limit .

For example if you have credit limit of Rs. 1,00,000 , then try to use not more than Rs. 30,000 out of Rs. 1,00,000 and paying them off on time.

4.  Limit new credit applications : Every time you apply for credit a hard inquiry is placed on your credit report. Too many inquiries can negatively effect on your credit score.

5.  Diversify your credit accounts : Try to diversify your credit accounts (like car loan , credit card , home loan ) which make positive impact on your credit score. But don’t open new accounts just for sake of it. Only take on credit you genuinely need.

Tips for maintaining good credit :

1.  Monitor your credit on regular basis : Keep track your credit report to ensure there are no errors or signs of identity theft. You are entitled to a free credit report from some credit bureaus(Equifax , Experian ) every 12 months through annual credit report.com .

2.  Maintain older credit accounts : If you close your old accounts it makes negative impact on your credit score . If you don’t use your older account let it open instead of close such account especially if it has a high credit limit , as this can help with your credit utilization ratio.

3.  Negotiate with creditors : If you are struggling to make payments. Contact with your lenders to discuss payment options . many lenders are willing to work with you , especially when you have a good payment history.

4.  Avoid to carry high balances : Even if you can afford to pay minimum amount , carrying a high balance month by month can make negative impact on your credit score , not only that it charge more interest . So , it is better to pay off full balance whenever possible.

Conclusion :  Good credit score does not happen overnight , it takes time to build good credit score. By following the above mentioned steps you can maintain a good credit score. High credit score open up good opportunities for better interest rates , more financial freedom and less stress when you comes to major decision like buying a house or car. You must keep in your mind that always pay off the balances on time and keep your balance low and be mindful of how much credit you apply for.

Take control of your financial future by understanding the importance of credit and making smart decisions which will benefit you for years to come.