12/08/2019
Finance – Improving Your Credit Score
As an investor, it is important that you understand how financial institutions operate in order to get the maximum benefits such as lower interests and higher loan quantum. When you approach any financial institution for a loan, they will first conduct a credit check with the local credit bureau. In this credit report, your financial history, number of credit cards you are holding, loans, payment history, delinquency and late payments, will all be reflected in it. With this information they will compute your credit score base on their set of criteria. A good credit score means lower interests and higher loan quantum; up to the ‘debt to income ratio’ set by the monetary authorities.
To build a decent credit score you will need to use credit because without using credit, it is unlikely that you even have a score as there is no information to evaluate. Financial institutions view someone with no credit record as a bigger risk than someone with less than perfect credit. You need at least two credit card accounts to have a credit score. By maintaining the ratios of credit utilised (< 30%) to credit limit on ‘each card’ and ‘paying promptly’, it raises your score; it shows you are prudent in managing your credit. When you close one of your credit card accounts it lowers your score because you are removing part of your credit history. Your closed credit card account however drops off your credit report after a few years. Taking up a personal loan if you do not have a loan and paying promptly is another way of building up a track record; this however may seem counter-intuitive to some people.
Always work within your borrowing capacity; start small if you have to and build up your capital and income gradually before qualifying for more loans.
