Credit score improvement requires strict discipline but it is possible – Here’s how to go about it

• Consistent timely payment of dues is critical in maintaining and improving credit score.
  
• Utilisation of credit cards should be kept low as compared to the credit limit.
  
• Avoid multiple credit enquiries as it may signal financial stress to lenders.

Having a healthy credit score of 750 and above comes in handy when you apply for a loan, especially a home loan. However, when Nirmalee Chaterjee (named changed) wanted to apply for a home loan in March, she found that her Credit Information Bureau India Limited or CIBIL score was about 650 since she had missed a few credit card payments.

Over the next few months, Chatterjee made it a point to be more disciplined and make an effort to improve her credit score.

How to improve your credit score

There are several ways to improve your credit score.

Pay your credit card bills and EMIs on time: Consistent timely payment of dues is critical in maintaining a good credit score and improving it.

“Borrowers should repay all loan instalments and credit card bills on time as any overdue payment results in a severe deterioration in score,” says Saikrishnan Srinivasan, Managing Director, Experian Credit Information Company of India.

Chatterjee ensured she paid all her credit card bills and EMIs on time. If her credit card statement showed a due amount of ₹20,000, she paid it in full by the due date or even before. This consistent on-time payment reflected positively on her credit report.

Have a long repayment history: The longer your good credit history the better chances of having a higher score. Additionally, the type of product taken, and the amount of credit availed also impacts the score.

"Borrowers should avoid taking excessive credit within a short span of time, as it may increase the risk for the lender and thereby affect the score adversely," says Srinivasan.

Credit utilisation: Utilisation of credit cards should be kept low as compared to the credit limit. If a customer keeps a high outstanding balance which is near the credit limit on the card, it can negatively impact the score in the short term.

Chatterjee managed her credit utilisation. The credit limit on her credit card credit was ₹1,00,000, she aimed to keep her spending below 30% of that limit, around ₹30,000. This helped maintain a healthy credit utilisation ratio, which further perked up her credit score.

Check your credit score regularly: It is important to review your credit score regularly and see whether it is improving. Seeing it slightly improve can also serve as a motivation to be more disciplined in financial matters.

Plus there could be some errors which pull down your credit score. In such instances one needs to get in touch with the credit bureau and get it rectified.

Chatterjee reviewed her credit report regularly and noticed an error—an old closed loan was still marked as active. She contacted the credit bureau and got it rectified, raising her score further.

Things you should avoid doing

Avoid multiple credit inquiries: Every credit application results in a hard inquiry on your credit report, and multiple inquiries can signal financial stress to lenders. “So, avoid unnecessary new credit applications, especially when planning major financial decisions like buying a home or car,” says Adhil Shetty, CEO, BankBazaar, a financial marketplace.

Avoid EMI reductions or loan restructuring: While facing financial challenges, it might be tempting to opt for EMI reductions or loan restructuring. “However, these factors go on to indicate that you are not in a financially comfortable position, leading to lower credit scores. Avoid such actions, especially when you are trying to repair your score,” says Shetty.

Cancel credit cards with caution: If you hold several credit cards with similar fees or benefits, think about cancelling similar cards, but do so carefully. Closing cards can affect your credit use ratio.

Prioritise cancelling the most recent card over the oldest one since the older card reflects longer credit history and better illustrates your repayment habits if you've been consistent in the past.

Last time Chatterjee checked, her credit score was 725 and she is confident of raising it to the 750 mark in the next few months.

Improving your credit score is a lot like losing weight, you will not see results in a day. Depending on what part of the borrower’s behaviour has changed in the recent past, it may take between one month to almost a year to see the full impact of improvements in the score.