How To Improve Credit Score Fast

A few days ago, I applied for a home loan. It was rejected.

When I heard about it from the bank, I was shocked. I had submitted all the documents that were required to prove my ability to repay on time. I was very confident about getting approval for the loan as well.

When I approached the bank to know the reason, I was surprised to know that the reason for rejection was a low credit score. 

What Exactly Is a Credit Score? What Is a Good Credit Score?

Now, before I could ask another question to the bank, I had to learn what a credit score is, as I was not exactly familiar with the term.

Turns out credit score is a number that ranges between 350 and 900, which is used to evaluate one's creditworthiness. Credit bureaus such as Experian, Equifax, and TransUnion determine it by assessing the financial history of a person through mathematical algorithms. A score of more than 700 is considered to be a good credit score.

Back to the Tale

I could not get the loan as my credit score was 550. It didn't meet the standard guidelines of a good credit score. Though I always paid my bills on time, there were a few mistakes in my credit history that I was unaware about! I was really disheartened, as this incident affected my plan of buying my dream home.

A Silver Lining

But if I look at the positive side, it led me towards in-depth research on credit score. I started reading articles on websites like mymoneykarma, which is a platform that not only provide free credit reports but also educates people on improving their credit score. Can I improve my credit score from 600 to 750? Maybe not in a month, but over time, yes.
The website also informs you about the terms related to it. So, let's talk about the mistakes that you should not commit, and a few steps that you should follow if you are facing the same problem - a low credit score.

Mistakes That I Made

1. I missed a few credit card bill payments.

2. I never checked my credit report, due to which I was unaware of the fact that credit score plays a significant role in the loan approval. Check your credit score regularly.

3. I had exceeded the credit limit of my credit cards.

4. Multiple hard inquiries had affected my credit score severely.

These were all mistakes that I could have very well avoided had I been alert. Now, as I have discussed the most commonly occurring mistakes, let me also tell you how you can improve your credit score if you end up committing them yourself.

Steps to a Stellar Credit Score

• Check Your Credit Score: Your credit report comprises the events in your credit history, which could affect your credit score either positively or negatively, depending on their nature. Check your credit score report for  issues that raise potential red flags, as it will help you know where to improve.
  In case there are any errors in your name, date of birth, email ID, or PAN, report it to the concerned credit bureau immediately and get the mistake rectified. Also, if there is any discrepancy in your loan or credit card account, inform the bureau without any delay. Henceforth, you can stay vigilant by checking your credit reports from time to time through the intelligent finance tool of mymoneykarma.

• Understand the Credit Report: When you check your credit score, remember that bad credit scores often reflect a history of credit flaws; such as late payments, defaulted or foreclosed loans, and even bankruptcies; on the credit report. Understanding the contents of a credit report can help you in rectifying the issues or mistakes that are reducing your credit score.

• Credit Utilization Rate: To evaluate the credit utilization rate on your credit card, divide the outstanding balance by the borrowing limit of your credit card, and multiply it by 100 to get the percentage.

Credit Utilization Rate = (Outstanding balance on the credit card / Borrowing limit of credit card) x 100

You can also use the same formula to calculate the credit utilization rate of all the credit cards that you have. It is advisable to keep the credit utilization rate below 30%, on a card-to-card basis, to avoid a drop in your credit score. A higher credit utilization rate indicates that the person has been overspending on credit cards and may not be able to pay the bills on time.

• Apply for a Secured Credit Card: A secured credit card has a small borrowing limit.  Banks generally issue it against a fixed deposit, providing the quantum of the loan or the credit limit at 80%-90% of the FD amount. Some of the credit cards offered against fixed deposits are SBI Unnati Card, ICICI Bank Instant Platinum Credit Card, ICICI Bank Coral Credit Card, and Axis Insta Easy Credit Card. Make regular payments while using the card. This is because the lender informs your credit activities to the credit bureaus.

• Reduce Credit Activity: Applying for new loans or credit cards within short intervals can hurt your credit score. Every new credit application triggers 'hard inquiries' into your credit, which not only reflects on your credit report but also impacts your credit score. In a hard inquiry, the lender pulls out the borrower's credit report to check his/her creditworthiness before taking the lending decision.
  Hard inquiries can slash your credit score by a few points, but you can regain the scores within a few months. This can be done if you continue your timely bill payments and avoid making additional loan applications till the time your credit score comes under the required range. However, if you are checking your credit report, it will be referred to as a soft inquiry, which does not impact the credit score.

• Pay Full Dues: Most of us end up paying the minimum dues that credit card companies offer while generating the bills. They calculate the minimum due as 5% of the outstanding balance on the credit card in a billing cycle. You can surely escape the late payment charges by paying the minimum due amount, but interest and taxes get accumulated in the next bill. 
  The amount keeps accumulating and often results in massive credit card debt. It can also knock off a few points off your good credit score. So, it's advisable to pay the full credit card dues to prevent the addition of interest and taxes to your bill. Spending the entire outstanding balance before the due date will raise your credit score inevitably.

• Prevent Impulsive Buying: A credit card offers the convenience of hassle-free shopping, which puts us in the trap of impulsive buying. Consequently, we end up spending more, and the bills rise beyond affordability.
  So, if impulsive buying is the reason for defaulting in the bill payments, it's better to control your spending habits. Not only does it reduce your credit score, but it also accrues late payment charges and taxes in the bill. The bill amount will increase, making it further challenging to pay on time and raising the possibility of another slump in your score.

• Avoid Cash Withdrawal Through Credit Card from ATMs: Don't fall into the lure of cash advance limits that banks offer on credit cards. The problem with withdrawing cash from credit cards is that the interest starts to accumulate right from the moment of withdrawal, unlike retail purchases, where a cardholder gets 20-50 days of interest-free credit. The bills rise high with a cash advance, and your credit score drops drastically.

To Wind-up

Now that you know the importance of a good credit score and have also learned the ways of improving your credit score, make sure that you maintain your financial health in good shape - and check your credit score regularly.

To avoid any further debacles involving your credit score, plan your budget well and spend wisely, such that you can always make bill payments on time.