BackGood habits for a healthy credit score
Credit history represents the creditworthiness of a person
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A habit is described as a settled or regular tendency or practice, especially one that is hard to give up. As we all know “bad" habits are easy to pick up and live with. It is the “good" habits that are difficult to learn, develop and cultivate. A good habit is a behaviour that is beneficial to one’s physical or mental health, often linked to a high level of discipline and self-control. The same rule applies to financial health as well. An example of this is credit score, which is a numerical expression based on the analysis of a person’s credit history to represent the creditworthiness of that person. It is very important, even essential, to have a good credit history, as it has an effect on a person’s ability to get credit later. There are a few things that can be done to develop a healthy credit score.
This is the golden rule of building a good credit history. Paying back on time proves your credibility as a good borrower, apart from saving you the expense of late fees and other unnecessary charges. Bills such as credit card payments and instalments for home, auto or personal loans need to be paid on time. If you are someone who doesn’t remember the due dates, it’s a good idea to use the facility of electronic clearance service (ECS). This will ensure timely payments and bring in financial discipline as you will be forced to keep the required amount aside in the bank account.
You may have multiple credit cards, and may get confused with the various due dates, which results in one or the other payment deadline being missed. Apart from setting up ECS for such payments, you can also ask the banks to adjust the due dates to one that is more suitable. What you have to do is approach the bank, and it will suggest a few dates. You have to choose the most suitable one from among the dates offered; you can’t select just any date.
Be aware of the amount of your debt, and set a repayment timeline and schedule. Seek professional assistance if need be to plan your repayments smartly, especially credit card dues. A credit card is convenient to use, but repaying the dues before or by the 45-day wait period is equally important. It’s best to pay the full amount due. But, if for some reason, that is not possible, ensure that you meet at least the minimum payment requirement; it’s better than not paying at all. Doing so shows other lenders that you are a responsible borrower. Rather than having the total balance (the full amount that you owe the lender) and paying up to 3% compounded monthly interest on it, it’s advisable to reduce your balance and effectively pay lesser interest. Of course, the best thing to do is to save before buying something expensive.
This is one of the best kept secrets in the world of credit repair and credit building. A live credit card does wonders to your credit score, as, being an unsecured product, the way you handle it month on month gives an indication of your credit behaviour. So, go ahead and apply for a credit card if you don’t have one yet. But with the perks comes responsibilities. Remember to use it prudently and repay the entire dues on time. Consistently high credit utilization, late payments, or even too many requests for credit cards are all negatives. Judicious use of credit and on-time payments indicate responsible behaviour.
It’s important to have a healthy mix of lines of credit, including credit cards, auto loans, home loans and even personal loans. A healthy and well-diversified credit portfolio goes a long way in proving your credit worthiness. It shows that lenders are willing to trust you with their loans. And the more available credit you have, the lower your credit utilization ratio will be. But there is a fine line that divides optimum usage from over-usage. Some people tend to say yes to every new card or loan offer. Some of these applications are approved, some are not. What they don’t realize is that the number of applications and repeated rejections from multiple lenders hurt the chances of their getting loans when they need it, say, to buy a house. Repeat rejections from multiple lenders pull down your scores, and dent your credibility. Avoid.
People with excellent credit usually get the best credit card offers. But be smart about the cards you choose. For example, retailers often offer discounts on purchases when you sign up for their credit cards. But these cards often have low credit limits, which can hurt your credit utilization ratio if you carry a balance on those cards. Cards with high annual fees also should be avoided. Always insist on a no-fee card. A smart thing to do is to look for a card that waives that fee for the first year and then re-evaluate the card in the second year to see if the benefits outweigh the fee.
You could also look for cards that offer a 0% interest rate for the first year. But this is only if are able to fully understand the often complicated fine details of how this loan will work. If not, please stay away and just opt for a no-fee card.
Sometimes, closure is more important than new beginnings. It is important to repay on time. And when it’s time to close the loan, ask the lender to return all the hypothecated documents (if any) and seal the closure document in black and white. For instance, you may want to sell your old car. You have paid all the EMIs and think the loan is “closed", when, in fact, you have not collected the documents from the lender, which the buyer will need to verify that no loan is pending on the car. Collect the closure letters (which will differ across loans) and verify if this has been updated with the credit bureaus. Old loans that are not closed are like teenage crushes you want to hide from your spouse; they pop out at just the wrong time.
The longer you’ve had credit, the better it is for credit score. Leave the oldest loan accounts (such as a credit card) open since this helps increase credit age and build a good record. It behaves like a confidence booster for a new lender, showing how responsible/irresponsible you have been in the past, and whether you can be trusted with the new line of credit. For young borrowers, it is especially important to use available credit lines and repay on time.
Aparna Ramachandra is the founder director of www.rectifycredit.com
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