Having a solid credit history and a great credit score are essential for one’s financial stability — and access to favourable lending options. Credit score typically ranges at 300-900 and indicates an individual’s creditworthiness, which is used by banks and other financial institutions to assess one’s ability to repay loans on time. A good credit score can open doors to higher credit limits and favourable interest rates. Here are the ways to build your credit score and improve it.

Apply for credit card

To build a credit history, one can either apply for credit card or take a loan. However, for a start, secured credit card is typically a preferred way to build a credit history. A secured credit card is one wherein the cardholder is required to make a one-time refundable deposit which can act as a collateral when she can’t make the payment online.

Further, a credit card, when used properly, can help you with a good score while applying for home loan. However, do note that one should never withdraw cash with credit card as this can entail substantial interest charges, typically 2.5-3 per cent per month, varying from bank to bank.

Keep CUR in check

Credit utilisation ratio (CUR) is also one of the most influential factors impacting your credit score. CUR is basically the ratio of the amount of money you owe on all your credit cards and loans compared to the total credit you are allowed. The higher you spend using credit, the higher is your CUR, which negatively impacts your credit score. Typically, having a CUR lower than 30 per cent is suggested

Exceeding this limit may harm your credit score, reducing your eligibility for borrowing from lenders. If you find your CUR approaching or exceeding 30 per cent, consider requesting a credit limit increase from your card issuer or utilising alternative payment methods, such as a debit card, to maintain your credit score.      

Pay loan EMIs and bills on time

Timely payment of dues consistently is essential to maintain and improve a good credit score. Any defaults or delays in EMI payments can lead to a negative impact on your credit score. Further, while payment of minimum amount (typically, 5 per cent of the amount) can spare you late payment charges, it is always better to pay more than minimum dues on your credit card. Paying only the minimum due amount can lead you into a debt trap which, in turn, can affect your credit score adversely.

Avoid multiple applications on credit products

One might be very much tempted to make applications for credit cards and loan in order to establish a credit history. However, do note that each such application can lead to credit inquiries by banks or other financial institutions into your credit report. There can be two types of credit inquiries — soft and hard. While a soft inquiry is kind of a routine one not linked to any loan application and can’t impact credit score, a hard inquiry can be directly linked with a loan application and can lower your credit score in the near term. Multiple such applications at the same time would mean a credit-hungry behaviour and hence, there should be a gap of a few months while making a new application.

Monitor credit report regularly

Reviewing your credit report periodically is an important part of your financial and credit journey. A credit report consists of a summary of all your credit accounts and helps you understand the factors affecting your score — such as CUR, credit history (in years) and credit mix i.e. mortgages, loans, credit cards, etc. In India, credit reports are prepared by four credit information companies (CIC) governed by RBI, namely TransUnion CIBIL, Experian, Equifax and CRIF High Mark. One can obtain credit reports from these entities. Further, one can also check whether there is any discrepancy in the reports and can rectify errors, if any.