Has it ever happened with you that you applied for a personal loan and it got rejected? You met their eligibility criteria and the documents were in order too. Wondering what went wrong? It could be that your credit score that may have turned the lenders away from offering you credit.
This may have happened because either you did not check your credit score online before submitting the loan application and you went ahead with an application even with a low credit score.
What is a Credit Score?
Credit score is a 3-digit number that reveals your creditworthiness to the banks and lenders, which in turn helps them decide the fate of your loan application. It is calculated based on the information held in your credit report as your payment history, number of loans or credit cards availed by you, along with other details. The information in your credit application helps lenders decide on the following:
- Whether to extend you credit or not?
- How much amount to extend?
- What rate of interest to charge you?
A high credit score increases your chances of loan or credit card application manifold because lenders perceive applicants with high credit scores as low-risk borrowers. While you may manage to get a personal loan approval even with a low credit score, you’ll incur a higher rate of interest costing you extra money. To prevent facing this problem, you need to work on improving your credit score right away.
Ways to Improve Credit Score
A few financial habits can improve your credit score by several notches. Here are some of the most important ones:
Keep Checking Your Credit Report
One of the most important and easiest ways to improve your credit score is by checking your credit report regularly. Checking your credit report will help you look for any possible errors, incidents of identity theft (if any), and other payment/settlement related mistakes.
Not paying any heed to these mistakes eventually brings the credit score down. By checking your credit report regularly and fixing the issues will make sure your credit report is free of any errors.
Keep Your Credit Utilization in Check
Credit utilization stands for the proportion of the credit amount used viz-a-viz the credit amount available to you. Overspending on your credit cards will make lenders perceive you as a heavy spender and thus a high-risk borrower.
Even if you pay your dues on time, it is advisable to keep your credit utilization ratio up to 30-40%. It shows you’re less dependent on the credit and eventually boosts your credit score.
Be Meticulous with Outstanding Credit Payments
Another sure shot way of improving your credit score is to be strictly regular with the outstanding credit payments. If you’ve a credit card bill outstanding or have a loan balance to pay off, pay it off immediately to improve your credit score.
Credit payment history is one of the most important factors taken into consideration by the lenders and banks while evaluating your loan application. Being regular with your credit payments and paying the full amount due before the stipulated date shows you’re a responsible borrower and it makes lenders believe you will be able to handle the borrowed amount wisely. Also, having a history of delayed payments and missed loan EMI payments brings down your credit score considerably.
Pay More Than Once in a Single Billing Cycle
It is good to make monthly payments on your credit cards but making payments more than once in a single billing cycle does wonders for your credit score. Paying more than once and more than the minimum required amount also clears off your outstanding balance. Paying more than once definitely reduces your credit utilization ratio and finishes off the debt faster. All these contribute greatly towards building a good credit score.
Build a Robust Credit History by Continuing the Old Credit Accounts
There is a simple rule to swear by – the longer your credit history is, higher your credit score will be. The credit history should be more than 5 years to be considered good. If you are not using your old credit cards and if there is no annual fee on their continuity, it is advisable not to close them. A long and strong credit history helps immensely in building a good credit score.
Avoid Applying for Multiple, Frequent Credit Cards/Loans
Every time you apply for a new credit card or loan, the lender pulls out your credit report for evaluating your loan application. This is considered a hard inquiry and brings your credit score down. Keep your hard inquiries to a minimum by avoiding applying for credit too frequently. Don’t apply for a loan or new credit card unless it is necessary.
Also, if you apply for a personal loan or credit card at multiple places, this attracts a negative marking regarding your image as a borrower and also brings down your credit score. Take your time to research, compare and select the lender that meets your requirement to avoid a rejection of your loan application.
It ultimately boils down to three things – reduce your outstanding amounts, maintain a good credit score by making timely payments, and adopt a disciplined approach towards maintaining your credit accounts.
If you have a low credit score, you can adopt the above financial habits to improve your credit score for sure. If this piqued your interest it is time to check your credit score online.
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