Consider this: You finally decide to buy your dream car. You choose to apply for a loan due to benefits such as tax breaks and better finance management than paying for the car out of pocket. Your paperwork is impeccable, and your loan history appears positive enough to you despite a few delayed EMI payments. But then, your car loan gets rejected.
What went wrong? Those few delayed EMI payments for your previous loan impacted your credit score, and your current lender did not consider you capable enough to repay a major expense like a car loan. This scenario outlines the importance of having a good credit score.
Do you want to improve your credit score but don’t know where to begin? Worry not. Consider this a complete guide on credit score and how you can improve yours with timely loan repayments.
How to Improve Credit Score With Timely Repayments?
Here are some practical tips to increase credit score with timely repayments.
1. Focus on High-interest Debts
High-interest rate loans tend to accumulate quickly and can hurt your credit score. Ensure you pay off your loans with higher interest rates to avoid letting them pile up.
2. Maintain An Emergency Fund
A financial emergency can arise without any warning. To stay prepared, always keep aside some amount as an emergency fund to avoid last-minute surprises and missed EMI payments.
3. Budget Smartly
Related to the above point, always allocate a part of your income in your monthly budget to avoid last-minute crunches leading to delayed or missed payments.
4. Automate Your Loan Repayments
Set reminders to pay off your EMIs on time, ensuring you never miss them and your lender remains assured of your creditworthiness.
5. Monitor Your Credit Report
Stay on track with the figures on your credit report to check for any discrepancies. Keep in mind that any errors can considerably impact your credit score.
What is a Credit Score?
Your credit score is a three-digit numeric (typically from 300 to 900) that signals your capability to repay a loan on time to a lender. Lenders and financial institutions use credit score parameter to assess your position before granting any loans.
The factors affecting your credit score include:
1. Payment History
Payment history impacts your credit score the highest. Paying your EMIs on time boosts your score, while missing or delaying payments can impact it harshly. To put it into perspective, missing or delaying just a single EMI payment can reduce your credit score by as much as a hundred points.
Your payment history contributes the most (35%) to your credit score.
2. Credit Utilization
This refers to the percentage of the total credit available to you that you’re utilizing. Let’s consider an example to help you understand better:
Suppose your credit card has a maximum limit of Rs. 1 Lakh and you have accumulated a debt of INR 30000. This makes your credit utilization ratio 30%. Having a low credit utilization ratio provides a comparative credit score boost.
Credit utilization contributes 30% to the overall credit score.
3. Credit History Length
It refers to how long your credit history is. Lenders view a longer active credit history as favorable. It contributes 15% to the credit score.
4. Credit Mix
It refers to the diversity of your credit portfolio, which means how many different types of credit or loans you have. Having a diverse debt portfolio signals to the lender your ability to manage multiple credit types.
It contributes 10% to the credit score.
5. New Credit
This includes how frequently you apply for or open new credit accounts. Applying for a new credit account can boost your credit score marginally. However, a higher frequency can reduce it.
It contributes 10% to the credit score.
What are the Benefits of a Strong Credit Score?
A credit score over 750 is typically considered a good or a strong credit score. The benefits of a good credit score go beyond fast loan approvals and include:
- Lower interest rates: A good credit score can help you avail of a loan at lower interest rates, reducing your repayment burden.
- Access to pre-approved loans: A good credit score also increases your chances of being eligible for pre-approved loans, allowing you fast access to funds with reduced documentation.
- Approval for higher loan amounts: A high credit score also elevates your chances of being approved for a higher loan amount, reducing your financial burden.
- Possibility of longer loan tenure: A good credit score can also help you become eligible for longer loan tenures. A longer loan tenure results in smaller EMIs, reducing your immediate financial burden.
Summing Up
A good credit score makes loan approval faster and provides several other credit-related benefits. By following the credit score tips on how to improve credit score given here, you can sustain a strong credit score, helping you easily navigate the world of credit.
Along with a good credit score, choosing a suitable lender goes a long way toward simplifying your loan repayment journey. If you need credit and are searching for a reliable vendor, look no further than Tata Capital, a reputed name in lending with decades of experience turning dreams into reality. Use our online calculator to assess your credit score before applying for a loan now!
FAQs
Some incidents like bankruptcy, foreclosure, or loan defaults can affect the time needed to bring back your credit score.
If you are availing credit for the first time, some options include asking your family relative or a friend to add you to their credit card as an authorized user or starting a credit-builder account.
Usually, a credit score of 600 is considered "fair," which is placed below the average "good" value.
Typically, a CIBIL score of 750 and above is considered good.
If you find any discrepancies in your credit report, file a dispute with your lender and resolve incorrect information as soon as possible.
03 April 2025
5 mins read
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