Credit health: Key factors and the best ways to improve your score

A combination of continued economic growth and an aspirational population India is set to turn into the world’s third-largest consumer market by 2026. Currently holding the fifth spot, the country has seen a steady growth in both individual and household spending in recent years, leading to companies from around the world vying to establish a solid customer base in the domestic market.

This trend has also accelerated the demand for personal credit, with people from all nooks and corners of the country seeking small and big-ticket loans to meet their needs and wants. Recent reports indicate that 37% of Indians sought loans to buy smartphones and home appliances in 2024, compared to just 1% in 2020. Further, 15% took credit for home renovation and construction, compared to 9% in 2022.

Why availing credit can be a good idea

If used smartly, credit can be an important component of good financial health. For people with low disposable income, it can help provide an immediate boost to their spending capacity, enabling them to achieve their dreams and goals. For the others, credit can unlock special rewards and deals and can also bring tax benefits. Most importantly, taking a loan can help in building or improving an individual’s credit score.

In simple terms, a credit score is a three-digit number that depicts a borrower’s ability to timely repay his/her debt. It is calculated after analysing a person’s credit history, which includes a variety of information, such as credit balance, repayment history, credit utilisation, and more. Most financial institutions rely on credit scores to make quick yet informed lending decisions.

People with good credit score stand to benefit from the following opportunities:

• Better prospects of quick credit card and loan approvals
• Lower interest rates on credit cards and loans
• Strong negotiating power and a brighter chance of approval for big-ticket loans
• Better housing options and insurance rates
• Brighter job prospects at top employers

Which factors determine credit health

While a credit score is a broad overview of a person’s financial health, a credit report is a more detailed analysis of the same. Credit reports are prepared by credit bureaus based on a variety of factors, including:

• Repayment track and credit utilisation ratio (CUR) — These are two major factors in a credit report. Timely repayments generally lead to a better credit score. Further, a low CUR has a positive impact on the credit report. CUR is the percentage of an individual’s credit usage compared to the total credit limit.
• Account age& enquiries — Another key factor in the credit report is the age of the credit account. Older credit accounts reflect well on the credit report. Further, seeking multiple credit products in a short time span can adversely affect the report. Whenever a person applies for a credit, the lender performs a hard inquiry on his/her credit report. Multiple inquiries in a short period can lower the credit score.
• Credit mix— Having a right mix of credit products can positively impact the credit score. A combination of secured and unsecured credit products can prove to be beneficial in some cases.

What are the best ways to enhance credit health

For an individual to “stay in the pink of credit health”, it’s important to exercise caution and discipline. A few steps that can help in ensuring credit success include:

• Make sure to settle all dues on time— This age-old wisdom can get great results in the long run. Even a single late payment can impact the credit score. For those who have multiple credit cards or loans, it’s always best to opt for auto-payment. More timely payments lead to improvement in credit score. Always pay your full credit card amount due and not the minimum amount due.
• Ensure credit utilisation is under 30%—Use your cards judiciously to keep the credit utilisation low. Tocalculate CUR,divide total outstanding balances across all cards by the total credit limit, and then multiply the number by 100 to get the percentage. Remember that if your family uses add on cards, the utilisation is calculated by combining the usage across all the credit cards.
• Maintain active old credit accounts—Maintain your older credit cards (e.g. the first lifetime-free credit card that you may have availed) and don’t close the account unless it’s causing an issue. Older accounts show your experience of having handled credit responsibly over a longer period of time and have a positive impact on credit score.
• Get the credit mix right—Credit mix is a term used to describe the different types of credit accounts an individual has. While it's not as significant as other factors, maintaining a diverse set of unsecured credit, secured loans and revolving credit accounts can aid in a higher credit score. This shows your proficiency in handling different kinds of credit and provides additional comfort to a lender.
• Minimise credit inquiries—After an individual applies for a new credit account, the bank conducts a hard inquiry on his/her credit report. Multiple such inquiries in a short time period can lead to a lower credit score. But It’s always good to avoid seeking too many credit products at the beginning of the credit journey. Apply for a new loan or credit only if you need them.

The credit journey can be tricky with multiple obstacles and complex problems. However, following a cautious and disciplined approach and staying up-to-date with rules and regulations can help a person in making his/her dreams come true while achieving credit success.

Sachin Seth, Chairman CRIF HighMark Credit Bureau and Regional MD India and South Asia, CRIF