Do you know how bankers decide whether to sanction or reject loan for an applicant? They have few pre-checks that helps them decide on the credit worthiness of an individual. The first on that pre-check is a credit score.
Investopedia defines credit score as, “A statistical number that evaluates a consumer’s creditworthiness and is based on credit history”.
In other words, it is the probability whether an individual would be able to repay the debts on time and in full quantum. A bad credit score can affect the prospects of being granted short term loans.
Credit score is calculated using a formula which takes into account several variables like the bank account transactions of the individual, previous loan transactions, the repayment pattern and so on. In the UK, a credit score in the range of 881-960 is ‘good’. The average credit score falls in the range of 757 and anything less would mean you will have very few loan options. (Refer – Telegraph)
Now, what if your credit score is broken? There are several reasons why your credit score could take a nosedive.
Some reasons that could lead to a credit score include:
- Late repayment of credit card bills – Belated repayment of EMIs, mortgage, credit cards, etc. can reflect poorly on your credit score
- Your account being charged off by bankers – Bankers charge off account when they find the account to be irrecoverable
- Filing for bankruptcy – Bankruptcy is the ultimate measure that could devastate your financial future for the good
- Maxed out credit cards – Over-the-limit credit cards and having too high credit card balances can make lenders frown down on your loan application
How To Maintain A Healthy Credit Score?
Maintaining a healthy credit score takes some amount of financial discipline and effort. Here are some ways how you can maintain a healthy credit score.
Use less of credit cards
Credit cards accumulate debt. If you have more than one credit card, you are bound to lose track of your balances. As a result, you will end up buying more using a single credit card which could negatively impact your credit score.
Set up payment reminders
Your hectic office grind might make you forget the payment dates for your credit cards. Missing the payment dates would mean several additional costs like delayed payment fee, compounded interest, etc. It would be worthy to set up payment reminders that will ensure you stick to the payment dates diligently.
Pay off debt as soon as possible
Well, the best way to keep your credit score at its best score is to pay off debt as soon as possible. Going back to point #2, set up monthly payment reminders. Or, still better, setup automatic wire transfers from your account to the loan account. It will save the trouble of remembering the dates as well or even missing them.
Monitor your credit score once in a while
A forgotten credit card or a bank account that you forgot to close can hit your credit score badly. Why take take risk? Get your credit report on a regular basis and see how your credit score is faring. If there are instances where it has been wrongly charged or deducted, escalate the issue to restore your credit score. In worst case scenario, you can even pay to restore your credit score.
Let’s face it. Getting financial assistance from banks and financial institutions is not an easy task. In fact, for most it is an unsolvable maze. A positive credit score will make things easy. These tips should help you answer that difficult question of how to maintain a good credit score.