In the last couple of weeks, you have looked at what a Credit Score is and how it impacts your financial creditworthiness (link). We have also realized how important it is to maintain a good credit score (link). But what if you already have a below average credit score that reflects poorly on your creditworthiness?

This part of the series provides you with ideas on how to improve your credit score quickly in order to restore your creditworthiness.

In our first article, we outlined the factors that have the most impact on the credit score. These are:

• The extent of credit used out of that available on credit cards
• The on-time repayment record of loans and credit cards
• Ratio of secured vs. unsecured loans
• Length of credit history
• Number of recent checks on your credit history

In order to improve the credit score, the following steps need to be taken:

Reduce the outstanding balance on your credit cards

A healthy availability of credit is a sign of financial stability. If you’re using more than 40% of your credit card limit, you need to bring it down. You can do this by several means such as:

1. Asking your bank to increase the credit limit, if you have a history of regular payments
2. Availing of a credit card balance transfer, which is a form of unsecured personal loan
3. Using a secured loan such as Loan Against Property (LAP) or Gold Loan to reduce the outstanding balance on the credit card

“Using secured loans has a two-fold benefit of not only reducing the amount outstanding on your credit card and giving you time to pay it off in the form of monthly instalments, but also increasing the ratio of secured vs. unsecured loans, another factor that determines credit score”, says Mr. Venkata Swamy, Product Head at HDBFS.  “This results in a significant improvement in credit history.” However, avoid going in for a settlement on your credit card outstanding if you can, as the credit card company will mark a “Settled” status, indicating your inability to pay the full outstanding amount.

Third party lenders like Non-Banking Financial Companies (NBFCs) and short-term lending applications can also help you with personal loans or credit balance transfers, though the rate of interest may be slightly higher due to your lower Credit Score. However, timely repayment will ensure you have a continuously increasing credit rating, thereby improving your credit score.

Make all your EMI/Payments on time

Timely payments show potential lenders that you have good financial health and can repay the instalments on borrowings in a timely manner. In case you are likely to miss a payment, you can look at short-term borrowing options like a salary/bill advance to make sure you do not miss your payment date.

Cycle your Credit efficiently

Many consumers use debit cards to pay for shopping, eating out, utility bills, etc. These transactions have no impact on your credit history. However, the use of a credit card in these locations can help improve your credit score if done right. By using your credit card and then paying it up on time from your debit account, you augment your credit track record of timely payments, thereby increasing your credit scores.

Use your oldest Credit cards

Once the outstanding balance on a card is removed, you may be tempted to close down a credit card to improve credit score. Make sure that while you do so, you retain the older cards, and close down the newer ones. The length of your credit history plays a significant role in determining your creditworthiness, and borrowers with a shorter credit history usually get less favourable terms on loans.

Check Credit History Regularly

Keep a regular track of your credit score (3-4 times a year) and learn to understand the components covered in it. Various sites offer you free credit scores when you register with them, so be sure to avail of such offers. If you come across any errors in credit reporting, such as a loan being reported due when it has already been closed, please bring them to the notice of the bank/lending institution immediately and get a closure/correction/amendment letter from them which you can submit to the credit agency. This will show a positive change in your credit score in the subsequent month.

Avoid Multiple Loan Applications in a short period of time

If you are interested in taking up a loan, it can be tempting to check with multiple banks/lenders simultaneously. However, the increased number of queries on your credit report indicate that you are possibly in a situation where you are unable to get a loan. This has an adverse impact on credit scores and subsequent queries show a drop in scores. Instead, generate your own credit report and then decide which lenders / banks you would like to apply for the loan. Online loan sites and app based aggregators can also help you here.

Using the above methods, you can see an improvement in your credit scores within a reasonable period of time, thereby improving your creditworthiness and standing with future lenders.