5 ways to improve your Credit Score

Credit Cards! Sounds like a very flashy and new term. But did you know that the first use of Credit Cards was recorded in the 1920s in the United States by Oil companies and Hotel chains? The banking credit card system that we see today only came into existence in 1958, when Bank of America introduced “BankAmericard”. This card was renamed VISA in 1976 when other banks wanted to offer card services to their customers without having to build the entire system themselves. Credit cards are now an integral part of daily finances. A credit card is a limited access card i.e., there is the eligibility of a good credit score to get a Credit card.

What is a Credit Score?

A credit score is a three-digit unit and is a representation of one’s creditworthiness. It helps the banks to identify if you can repay the debt in time. A credit score usually ranges from 300-900, and the one with the highest score is considered to be the most trustworthy applicant. If you are in the highest range, it becomes very beneficial, you might get a loan or credit card approval very easily, and that too at attractive rates. Whereas, if you have a low score, it implies that you are an irresponsible loan applicant and have not made timely payments of your past loans/dues.

What does a Credit Score range imply?

5 ways to improve the Credit Score:

Here are the five factors that affect your credit score. Managing these five factors can improve your credit score to a large extent –

  1) Payment History: 35% of your credit score is calculated on the basis of your payment history. You can get a high score if a majority of your dues are paid on time. Never miss out on payments as this would leave a negative impact on your credit score.

  2) Credit Limit usage: 30% of your credit score depends upon how much you owe on credit cards and loans. If you utilize your limit to the fullest it would lead to a drop in your credit score, as it indicates that you need debt more often. So, small balances and timely payments would help in increasing the score. This is measured with the help of the Credit Utilization Ratio. A 30% credit utilization ratio is considered to be good. E.g., If you have a credit limit of Rs. 1,00,000 then ideally you should be using less than Rs. 30,000.

  3) Credit history length: 15% of your credit score depends upon how long have you been using debt. If your history of on-time payments is long then definitely you would have a higher credit score.

  4) Number of products used: 10% of your credit score depends upon the types of loans you have. Having a mix of various credit products like credit cards, home loans, business loans, loans against FD, etc. improves the credit score.

  5) Credit Activity: Remaining 10% of your credit score depends upon your credit activity. Credit activity is like an overall impact of all the above factors that include the opening of various bank accounts, repayment history, types of loans used, etc.

So, getting a credit card might be easy, but maintaining it is difficult. Just keep a regular track of the 5 things we discussed above and you’re good to go. Until next time!