Tips to build a good credit score: Business Line

Your credit score is the key to your financial health, and is a trusted indicator of your creditworthiness. A good credit score can make your loan processing faster, smoother and simpler.

Interestingly, credit cards can help in the process of building and improving your credit score. The spending pattern and payment behaviour on the credit card speaks volumes about your financial discipline.

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A study of the patterns in the last year suggests that while the number of credit cards per borrower has remained the same, the average balance per borrower has increased during this period. This implies that credit card holders are utilising their cards for higher amounts compared to the previous year. The average balance of a foreign bank cardholder has risen from around Rs 61,000 to Rs 82,000, and in the case of domestic banks, the average balance has risen from Rs 39,000 to Rs 47,000.

Also consumers have become savvier about the importance of their credit history and credit score.

We are seeing an increasing number of consumers accessing their own credit report and score directly from CIBIL. Besides, in the last one year, the percentage of cardholders who have not met their payment obligations for more than 90 days has dropped from 2.82 per cent in the fourth quarter of 2010 to 1.62 per cent in the corresponding period in 2011.These are positive indications of the evolving credit discipline and credit awareness in our country.

Here are a few tips on using the credit cards to your advantage for building a good credit score and a healthy credit history.

A good credit score can be built and improved by making regular payments on credit card bills. Regular payments show a healthy credit history and help in winning lender’s confidence in your creditworthiness.

It is also advisable not to apply for too many credit cards in a short span of time. If you have made applications for credit cards, this will reflect in the “Enquiry” section of your CIR (Credit Information Report) and will negatively impact your credit score. Simply because, this credit behaviour indicates that you are “Credit Hungry” and implies that you are constantly looking for credit.

Once you have availed a credit card, it is advisable to keep it for at least 12 months before closing it. The frequency of “opening” and “closing” a credit card account reflects on your CIR and credit score and impacts the lenders assessment of your credit management capacity. 12 months of history on the credit card, whether used or unused, is good enough for a lender to assess your financial standing and repayment capacity.

If the add-on facility has been available, which means adding additional card on to your main credit card for any dependent such as spouse or child, it becomes important to monitor and make regular payments on these cards as well. The onus of the repayment of dues on add-on credit cards rests solely on the main credit card holder and impacts the owner’s credit score.

Setting an alert on credit card payments is a useful way to keep an eye on the usage and spending. Most of the credit card providers will be happy to alert you on credit card payment dates through SMS and email, if you subscribe for it.