A good credit score plays several roles in your financial life. First, a good credit score—that’s anything above 750—helps you get the best loan and credit card offers where interest rates offered to you are better compared to someone with a lower score. On the flipside, a weak credit score makes all the above costlier to fulfil.
Second, your credit report gives you a monthly snapshot of the impact of your credit use on your score. For instance, if you were late on EMIs or credit card payments, applying for too many credit lines at once, or maxing out your credit, there would almost certainly be a negative impact on your score.
A good credit score doesn’t require an Oppenheimerian level of calculation. Let’s focus on five basics points.
One: Pay your dues in full and on time. The dues can be from three kinds of credit relationships: your own loans and credit cards, those you co-own with others (such as a home loan, or an add-on card for your spouse), and those you’re a financial guarantor to. If payments are late in any of these cases, your credit score will fall.
Two: Avoid paying the minimum amount due (MAD) on your credit card. If your MAD is 5 per cent and the rate of interest is 4 per cent, you are effectively paying back only 1 per cent of your dues. The longer you keep on paying only MAD, the more your interest compounds, and the more your spending limit gets used up. This lowers your credit score. Therefore, ideally do not go over 30 per cent of your spending limit, and don’t forget the first point: pay back in full.
Three: Avoid making too many loan or credit card applications in a short span of time. Each credit application leads to the lender checking your credit score, and each such check lowers your score marginally. Go online, do your research, understand your eligibility, and thoughtfully apply for credit, one product at a time.
Four: Use your credit card. You cannot have a credit history without credit, and a good credit history will help you get good loan offers when you are in the market for any loan.
Five: Keep an eye on your credit score. A monthly free check doesn’t hurt your score. It will help you understand how your credit use impacts your score. It will also help you spot problems and errors to fix in your credit history.
The author is the CEO and co-founder of Bank Bazaar.