Studies show that 2 in 3 borrowers in India are not aware of their credit score and don’t realise the impacts of having a bad credit score.
Bad credit makes it challenging to qualify for loans and credit cards and increases the overall borrowing costs, which puts extra strain on the borrower’s finances. Before you experience the adverse effects of a bad credit score yourself, you can take the proper steps to improve and boost your credit ratings.
Additional Reading: How Can I Improve My CIBIL™ Score Quickly
How to increase my credit score fast?
Before we look at the tips, let’s drop a truth bomb – it takes time to improve your credit score, and you cannot see results overnight. With that said, there are a few actions that you can take right now to increase your score by 50 or more points within the next 2 to 3 months.
Tip #1: Dispute and Rectify Errors on your Credit Report
If you’re looking to improve your credit score fast, the first step is to dispute errors on your credit report. Some of our clients could increase their credit scores by 100 points by rectifying mistakes on their reports.
- The first step is to get your credit report from India’s leading consumer credit bureaus – Equifax, Experian and TransUnion CIBIL™. As per RBI norms, all credit bureaus offer one free credit report to consumers annually.
- Look for any errors in your credit report. Especially watch out for negative items like payments, inaccurate accounts, etc. If you notice any error or misreports, raise a claim with the corresponding credit bureau.
- You can file the claim online by providing the required details. All credit bureaus have an online form that makes it easy for consumers to raise disputes.
The credit bureau will check with your lender(s) to see if the information disputed is inaccurate. If it’s incorrect, the mistake will be rectified, and you can see your credit scores rise.
Tip #2: Pay off High Credit Card Balances
Your credit card balance (the credit utilisation ratio) has a significant impact on your credit score. You must maintain a low credit utilisation ratio for a good credit score. The ratio is computed by calculating the current card balance to the overall available credit limits.
Ideally, you should have a credit utilisation ratio lesser than 10% to 20%. To give an example, if you have an overall credit limit of Rs. 50,000, then aim for a credit card balance of Rs. 10,000 or lower.
We’ve seen clients whose credit scores fell by 30 to 50 points when their credit card utilisation rate was more than 50%. If you have a high credit utilisation ratio, pay as much as possible to bring it down to 20% or less. Once you pay off outstanding credit balances and keep card utilisation low, you can expect your credit score to go up in a couple of months.
Tip #3: Consider Debt Consolidation
If you have multiple credit card balances and too many debts, it increases your overall credit utilisation. The easiest way to lower your credit utilisation is to consolidate all your debts. You can use either one of the following two methods:
- Go for a Balance Transfer Credit Card
A balance transfer credit card allows you to consolidate all your credit card balances into one single account. There are two significant benefits of this option:
- Balance transfer credit cards usually come with 0% interest for the first few months. This gives you extra time to pay your outstanding credit card balance without incurring additional interest.
- Two, the credit limit of the balance transfer card is added to your total credit limit. As the available credit limit increases, it decreases your credit utilisation ratio.
- You can opt for a Debt Consolidation Loan
These are loans that you take to consolidate your credit card balances and other debts. Debt consolidation loans have a lower interest rate than other expensive products like credit cards and personal loans. This is another way to bring down your credit utilisation since instalment loans are not included in the overall credit limit.
*Irrespective of the method you choose, keep in mind that you still have to pay off your debts on time. Don’t make the mistake of failing to repay your debt consolidation loan on time, as it can further pull down your credit score.
Tip #4: Make all your Debt Payments on Time
Your payment history is the most significant factor that impacts your credit score. Make sure that you repay all your credit card bills and loans on time. Keep in mind that your debt payments are reported to the credit bureaus and contribute towards your score. Every time you delay a payment, it’s noted in your credit file and hurts your payment history, which brings down your credit score.
Keep in mind that just because you made a couple of payments on time, your credit score won’t shoot up instantly. The key here is to be consistent. As you continue making payments on time, your credit score will increase.
Tip #5: Set up Auto Payments
You can avoid missing payment due dates by automating them. Here are a few ways to set up auto payments for your credit card bills, loan EMIs and other utility bills like your mobile bill, EB bill, etc.
- Check with the vendor – Contact the credit card issuing company, loan issuer and other vendors to determine how to set up auto payments. They will guide you on setting up the auto-payments so that you don’t miss paying the bill on time every month.
- Go via your bank – Log into your internet banking account via the website/mobile app. Search for how to set up auto-payments. Set up a mandate for monthly payments.
Tip #6: Do not apply for New Credit Cards or Loans
Every time you apply for a credit card or loan, it triggers the following actions:
- It leads to a hard inquiry. A hard inquiry is when a credit card company or lender pulls up your credit report for evaluation purposes. Hard inquiries are noted on your credit report and can drop your credit score by a few points each time there is one.
- Opening a new credit card lowers the average age of your credit accounts.
Neither of these two factors has a massive impact on your credit score, but they can drop your score by a few points. This can impact you negatively, especially when you’re trying to build up your score.
Tip #7: Diversify your Credit Portfolio
Having a mix of credit types is advantageous to your credit score. You can boost your credit score by including various kinds of credit in your account like:
- Revolving credit – The most famous example of revolving credit is credit cards. You borrow money from a prefixed limit, and the limit gets restored when you repay the current balance. It’s also known as rotating credit.
- Instalment credit – Here, you borrow a lump sum from the lender and repay the principal and interest as periodic instalments. Personal loans are an excellent example of instalment credit.
- Secured credit – To obtain a secured loan, you have to pledge collateral. Popular examples of secured credit include home loans, car loans, bike loans, etc.
Improving your Credit Score is certainly Worth It
Increasing your credit score by 50 points is no easy task. The time and effort you put in are certainly worth it. To answer the most common question, “how long does it take to improve my credit score by 50 points?” Well, there is no definitive answer. It depends on where your current score is, your existing debts, and your determination.
Having a good credit score is certainly worth it, as it makes borrowing hassle-free and cheaper. Use the tips listed in this article to make progress with your credit score.