We've all heard the term credit before.

Credit is generally an  agreement between a borrower and a lender, where the borrower receives something of value immediately and agrees to pay for it later, usually with interest (depending on the date). Having the access to credit allows people to purchase products or services that are needed urgently.

Take for example: Sharon has only 10,000 INR in her bank account, but she has to to fly out to Delhi from Bangalore for an urgent meeting. If she didn’t have the access to credit, she would have had to dip into her bank account and spend at least 50% of the money which would have ranged from 4000 to 5,500 INR.  On the other hand, if she did have the access to credit she could just use her credit card to buy the ticket and budget to pay the ticket off on the next repayment date. 

What is a credit score?

Credit is a tool for good but still can be problematic if you do not know how to effectively use it. The utilization of credit in a reliable and intelligent manner will open a lot of doors for you and help maintain a good credit score. Credit scores are calculated by credit bureaus in India after taking into consideration several factors like payment history, credit exposure, credit mix, credit inquiries, and the length of credit history. A credit score ranges from 300-900; lenders consider a score 0f 750 and above as healthy. Hence, you should always aim to keep track and take measures to keep your credit score above a 750. While it may be daunting to start on this journey, this blog will help you understand the use of credit, how it is calculated and using credit the right way to maintain a good score.

Now that you have an understanding of credit, how credit is used and what credit scores are, we will take a look at the impact each factor has on your credit score.

1. Payment history: high impact
2. Credit utilization : high impact
3. Credit history length: medium impact
4. New credit: low impact
5. Credit mix: low impact

Factors that are not taken into consideration when your credit score is calculated are your age, present salary, or the tenure of your employment.

Steps to maintaining a good credit score:

1. Avoid late payments

Your repayment history is extremely important as it has a high impact on your credit score. Any type of repayment related to EMIs, credit card bills or loans should not be delayed. You have the option to avoid late payments by choosing the auto-pay mode, setting up reminders or even adding this to the list of expenditures on your monthly budget as an expense. 

2. Your CIBIL report needs to be reviewed regularly

Another important factor to consider doing is to check your credit report regularly for any inaccurate information. If there is any disparity or inconsistency in the name or even if your changed address has not been updated, do not fret. You can reach out to the concerned authorities and get this issue resolved. Doing this helps in the improvement of your credit score.

3. Maintain your credit utilization

Your credit utilization should be maintained below 30% of the total available credit limit. You can achieve this by balancing your expenditure from one to multiple credit products. Attaining a low credit utilization ratio, will help you build and maintain a good credit score that will benefit you and make you more financially secure.

4. Build a good mix of credit products

Maintaining a good credit mix is another factor that you have to keep in mind. 

When lenders make a decision on what loans or interest rates to offer you, it works in your favour to make them see a steady payment record on a mix of credit types. When lenders are making a decision on what loans or interest rates to offer you, it helps them to see a steady payment record on a mix of credit types - as this shows that you can manage the different responsibilities that come with choosing a varied amount of credit products.

5. Avoid multiple or frequent credit enquiries

Applying for multiple credit opportunities can do more harm than good. Frequent loan applications send a negative message to lending institutions about the applicant, which in turn might increase the chances of loan rejections. Remember to apply for fresh credit only when the need arises.

6. Do not use all of your available credit limit

Having access to credit is a form of freedom. Do not let it become a burden. One way to avoid this is to avoid using your credit limit to the maximum. An  increase in credit utilization can lower your credit score. Nevertheless, if your expenses are still burdening your existing credit line, you have the option to request the bank to increase your credit limit. 

7. Do not close old accounts

Think carefully before you close or discontinue your old accounts or credit cards. Both of these demonstrate a long association with your banking institution and showcase your repayment history. The closure of your old credit cards or account will cancel your previous record with the bank, hence this could negatively impact your credit score.

Disclaimer: The information in this article is compiled from various sources and is an opinion piece only. This is not to be taken as a substitute for professional advice on managing finances, reader discretion is advised.