How can I maintain a good credit score?

What are some common mistakes that can negatively affect my credit score, and how can I avoid them?

—Name withheld on request

A strong credit score is a good field to monitor in one’s financial report card. There are a few simple but sometimes difficult to consistently follow actions, to watch for. These are linked to the factors that add up to one’s credit score.

Being late on credit card bill payments or missing a payment is one of the biggest contributors to a bad credit score. A quick fix may be to set up an auto debit on that particular due date or set a digital reminder on your phone.

Another factor to consider could be how much of one’s credit limit has been used. If an individual habitually maxes out their card limit, it could be a red flag. Clearly, spacing out expenses over time is a possible solution to this situation. Similarly, if one has sought an unsecured loan from multiple lenders or avenues to fund purchases, it may work adversely towards their score. Here, a behavioural shift toward lesser overall leverage and controlled spending habits may be a good way toward overall financial well-being.

Some people resort to spreading their spending across multiple lenders and leverage themselves and think this is a sound strategy. This can prove to be counterproductive. Juggling multiple credit cards often leads to oversight regarding expenditures and due dates, compounding the risk associated with late payments and over leverage.

Lastly, and surprisingly for some, having no debts is also not the solution because an established credit track record is created only by taking some loan or credit cards and paying back on time.

What are the benefits of having a good credit score?

-Name withheld on request

A credit score is represented in a number that ranges between 300 and 900. The closer to the higher end one is, the better the score. This parameter assumes great importance as it is one of the first factor used by a potential lender to evaluate creditworthiness and loan repayment capacity of borrowers. In simple terms, it can be compared to a VIP entry pass which gives you access to lower than rack interest rates, certain pre-approved loan offers, quicker loan sanction times, higher limits, etc.

Applicants with higher credit scores get funding at lower or more competitive interest rates across various types of loans and credit cards. This is because one’s propensity to pay and on time is established by the high score. Even a quarter per cent lower rate can impact one’s EMI meaningfully. In addition, one can get offered a loan tenor which is longer than the normal offer, which again is a benefit for some individuals’ financial well-being. If one has a good credit score, then credit cards for example welcome that individual with a higher limit.

If one has a good credit score, chances of getting a ‘pre-approved’ and ‘personal’ or unsecured loan from Banks and NBFCs may be higher. Thus, one enjoys better negotiation terms with lenders.

Akriti Singh is chief alliances officer, India Mortgage Guarantee Corporation.