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What’s goes into a credit score and how to maintain a good one?

A credit score reflects your financial credibility and can impact both your personal and business finances. Whether you are managing your personal finances or running a small business, it’s your credit score that defines the health of your finances.

What is Credit score?

Let’s start with how credit score can be defined and what are the factors that constitute one. Credit score is an outcome of various debts you are having and how you are managing the repayment. Various loans/debts you have availed, financial transactions on your credit cards and how you are repaying them, give you an outcome, which is your credit score.

How managing Debt impacts your Credit Score

The debt that you have taken in the form of loans, credit card purchases are critical in deflecting your credit score. If there are delays in paying EMI on the debts then it can lower your credit score and can impact the credit stability. Paying a vendor for a purchase or service does not constitute your credit score. So, the priority for you should be to pay your credit card dues and Loan EMIs on time, as per the schedule to maintain a healthy credit history.

Be Smart with Credit cards

You must be tempted to apply for a new credit card with alluring benefits offered by different brands. But here you have to be smart enough to make a choice and especially when it comes to closing an existing credit card. Even if you are using an old credit card only once in a while, it’s advisable to retain it. It gives the thorough history of your financial transactions, which gives a good depth to the credit score. Be very specific when it comes to retaining a credit card or closing one. Make sure you receive a proper closure proof from the lender so that no undue charges keep occurring, which might affect your credit score.

No cash from Credit Card – Make it a cardinal rule

At times lenders offer credit cards with a cash withdrawal limit. Withdrawing cash from a credit card is one of the most natural mistakes we commit. Often banks charge a higher interest on withdrawing money from credit card, as compared to purchase transactions made. Also, cash withdrawals made from a credit card indicates your desperate financial need to lenders, which can impact your credit score in a bad way.

Be selective with your credit utilization

Having a credit card should be more of a credit support to you for selective purchases, not a priority to make most of your purchases. You have to be very selective when it comes to deciding to make a purchase from your credit card, as it will raise your debt which means chances of default in a crunch situation. If you are not able to pay any of these debts as per schedule, then it can further hamper your credit score. Using only upto 30% of your credit limit is advisable, to keep your debt in check and make repayment easier. This will keep your credit score high and your credit reputation healthy.

Be punctual with your repayments

The most fundamental rule of repaying the debt is to be very punctual with your EMI dates. You have to ensure that every EMI, whether on a loan or a purchase made on a credit card, should be paid exactly on time. Every miss in paying the EMI on time, will have a hit on your credit score. If you are a business owner then have a check on your credit flows and be very sure that you have enough balance to pay the existing institutional credit. The payments that can impact your credit score should be the priority for you and then make arrangements for other payments.

Also, when you are paying credit card dues there will be 2 parts to it; minimum payment due and total outstanding payment. If you choose to pay the minimum payment due, and make further transaction from the credit cards, then there will be an interest on the new outstanding amount on your credit card. This further impacts your credit score and keeps adding to your financial burden.

Make a well informed decision on any new credit

The market is flooded with credit cards with different value proposition and offers, be absolutely sure when you need a new credit card or raise the credit. Any new credit that was not necessarily required, impacts your debit to equity equation and disturbs your credit balance. It also comes with interest charges from the lender, which could have been avoided if you hadn’t raised your credit limit or acquired a new credit card. Every new credit card you have requested for or acquired, have an impact on your credit score.

Say no to settlement option

Often people like to opt for a settlement with the lender, when they are overburdened by debts. Lenders might agree to write off a certain amount of debt on your loans or credit card dues, which is known as Debt settlement. You might be thinking that debt settlement has eased the financial burden on you, but it also documents your inability to pay the debt in full. Now the lender will finally convey to the credit bureau that you are unable to pay the whole outstanding amount and thus debt settlement was done. The bureau will put a tag of debt settled on your credit report, but it will affect your credit score, further making you little less credible financially.

Enquire only when you most require

Don’t make too many applications while looking for a new credit card, loan or any new line of credit. It can bring down your credit score, especially when a lender rejects your application on credibility grounds. Constant rejections from different lenders will pull your credit score further down.

Maintaining a good credit score is more about the way you manage different resources in your life. But you should be well informed about how much credit one should have, so that the repayment can be easy and hassle free. Keep a regular check on your credit score so that it can offer you access to a better line of credit, for your future needs.