Monday, October 8, 2018

How to improve your credit score through simple snowball effect?

If you are reading this you are definitely looking for improving your CIBIL score (the most widely used credit score referred by lenders to hand out the loans) and this article will certainly help you in achieving this objective specially if you haven’t taken a loan before.

Since you don’t have a credit history the lending institutions will hesitate to approve your loan application especially medium to large ticket sized loans for items like Cars, Home etc. Let’s first understand the range of scores assigned by credit rating agencies and their grades:

Credit Score Ranges
0 or -1
No Credit History
550 - 300
750 and above

If you fall into the first three categories of the above table, not only there is higher chance of application rejection but also the cost of loan is going to be higher, which is the interest rate you pay on the loan amount. The only way to improve your credit score is to make timely payment on your dues and in short term that can be done either by having a credit card and paying all its dues timely every month or you can improve yourCredit Score with Personal Loans.
While improving your credit score with personal loans is relatively easy & quick, Credit cards are expensive to maintain and most of the basic credit cards have annual charges on top of very high interest rates and penalty in case you miss the deadline by even a day. On top of that there are several things to keep in mind (mentioned in general guidelines below) while using a credit card so that your score is not hampered for the lack of knowledge.

So what is a snowball effect and how can a personal loan help improve CIBIL Score fast?

To start building or repairing your CIBIL score, you can use a personal loan and pay all your EMIs on time. Always use 30% of your available credit line. Such small personal loans are easier to pay and help improve your CIBIL score incrementally. This method of improving your CIBIL Score or any other credit score is also known as 'Snowball Effect'. 

For instance, if you have a salary of 20,000 INR per month and have never taken a loan or used a credit card previously, your credit score will be 0 or -1. However, online loan providers like PaySense can offer you an instant personal loan of Rs. 5,000 to 2 lakh; which you have to repay in a duration ranging from 3 months to 24 months. Let’s assume that you take a loan of 5,000 for 3 months and pay your EMIs regularly on time, your credit score will start increasing. After 3 or 4 such short-term instant personal loans which are easy and affordable to pay, your credit score will improve to 650 and above within a year.

Following are eight general Do’s and Don’ts guidelines for your credit score:
  1. Pay all of your EMIs on time. Your payment history makes up 35 percent of your credit score. Even one late payment can lower your score dramatically.
  2. Don't close any credit card accounts just before you apply for a loan. Credit utilization, the amount of all revolving debt divided by your overall credit lines, accounts for 30% of your score.  The more credit you have available to use, the lower your credit utilization.  The lower your credit utilization, the higher your score.  When you have more credit available, you have a better chance of getting a desirable interest rate on the loan. Wait until after you secure the loan to close the card.
  3. Call your lenders to have your credit limits increased. Increasing your limit decreases your credit utilization, which increases your credit score.  Even if you have a secured card, you might be eligible for a credit line increase if you’ve been making timely payments.
  4. Do review your credit reports at least once per year to make sure you aren’t a victim of identity theft.  Having items listed on your credit report that aren’t yours can negatively affect your credit rating. 
  5. Do request copies of your credit scores at least a few months before making any major purchases, such as a home.  This will allow you to take simple steps now to help get your credit in the best shape for that loan down the road.
  6. Don’t transfer a balance to an account with a lower limit, as this will increase your credit utilization.
  7. Don’t assume that neglecting bills that are not reported to a credit bureau, like utilities is allowable. Should these bills go delinquent, they might be sent to a collection agency.  The biggest motivating tool for getting paid used by collection agencies is reporting the delinquent account to the credit bureaus.  Anything reported by a collection agency can sink your rating.
  8. Create a plan to pay down your debts and stick to it. Not only does carrying a high balance on a credit card cost you lots of money in interest, it also drags down your score. To pay down balances as fast as possible, pay off debts with the highest interest rates first.

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