In an age when education, healthcare, and even daily household expenses are increasing exponentially, your ability to borrow funds when needed becomes increasingly important. Imagine having trouble getting enough funds for your child’s education, or having to give up on your dream home because your loan was rejected due to bad credit. Banks and other financial institutions look at various parameters when assessing your loan application. There is a careful examination of basic parameters such as age, income, employment profile and place of residence, after which your credit score is checked. While there isn’t much you can do about your age, income, or job profile, you need to build a good credit score. Here’s how to do it:

Guarantee a healthy mix of credits

Credit composition refers to the ratio of your secured and unsecured debt. Usually, lenders prefer those who have a higher share of secured loans such as home loans. Credit bureaus, too, rate these borrowers favorably. If you have a high share of unsecured loans such as personal loans, credit card loans, and student loans, you are probably a “less preferred borrower” for a financial institution. If you have multiple home loans and are planning to pay them off, start with unsecured loans. An increased share of secured loans will increase your credit score.

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Maintain the credit utilization rate between 30 and 40%

This ratio refers to the proportion of the total credit card limit that you are using. For example, if your credit limit is Rs3 lakh, of which you used Rs30,000 this month, your credit utilization rate for the month will be 10%. Since financial institutions prefer to lend to those with a credit utilization rate of up to 30-40%, credit bureaus reduce your credit score if you exceed that level. If you frequently go over the limit, request a credit limit increase or request an additional credit card.

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Do not apply for credit from several lenders at the same time

Whenever you apply for a loan or a credit card, the lender or the card issuer will get your credit report from the bureau. Such requests initiated by the lender are called serious inquiries, where the credit bureau reduces your score by a few points. Too many of these requests in a short period of time can be detrimental because not only will your credit score go down, but you will also be designed as a greedy credit applicant. Lenders treat these applicants as risky, thus avoiding lending. The chances of getting lower interest rates will also be minimal.

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Collect your credit report at regular intervals

The first step towards improving your credit is to collect the credit report and examine it carefully. It tells you where you stand and if you need to take urgent action to improve your score. It helps to detect inaccuracies. I have been the victim of such inaccuracies. A few years ago, I was refused a home loan from a large public sector bank. As I wondered, I realized that the credit defaults of a namesake had been linked to my name because of which my credit score nosedived.

Remember that the credit bureaus receive data from your existing lender and credit card issuer on your credit

behavior regularly. As the bureaus use this data to calculate your credit score, any discrepancies in reports from lenders or credit card issuers will affect your credit score. To detect such errors or fraud, check your credit report periodically and report errors, if any, to the lender or card issuer.

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Timely reimbursement of IMEs, credit card dues

Although the bureaus do not disclose the method of calculating the credit score, it is widely believed that the way you pay off debt gets maximum weight. Always ensure timely repayment of your Equivalent Monthly Payment (EMI) and full credit card dues for a high credit score. Many people make the mistake of paying only the “minimum amount owed” on credit cards. This not only attracts heavy loads but also drastically lowers your credit score.

Naveen Kukreja is the CEO and co-founder of Paisabazaar.com

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