Summary of this article
High credit utilisation can limit score improvements
Multiple enquiries may affect your credit profile
Errors and short histories can keep scores stagnant
Paying your credit card bills and loan EMIs on time is essential for maintaining a healthy credit profile. However, just making timely payments does not guarantee that one's credit score will keep rising. Credit scores are influenced by several factors, including credit utilisation, credit mix, recent enquiries, length of credit history, and the accuracy of information in your credit report. Here's how you can fix your credit score.
High Utilisation Undermines Good Work
Credit utilisation refers to how much of your available revolving credit you use. For example, if your credit card limit is Rs 1 lakh and your outstanding balance is Rs 50,000, your utilisation is 50 per cent. Constant high utilisation can reveal a heavy dependence on credit, even if you pay the entire bill on time. This can limit improvements in your score.
“Paying off your bill in full is a win, but if you're always using 60-80% of your credit limit before that payment, lenders and scoring algorithms see someone who's stretched thin. Utilisation is based on the balance reported to the bureau, usually the statement balance, not the final paid-up amount. A perfect payment history can be built on a utilisation ratio that's quietly dragging the score down. Pay off balances to below 30% of the limit before the statement is generated, not just before the due date, and this will show up within a month. If spending habits remain the same, requesting a credit limit increase from the issuer also reduces the utilisation ratio almost immediately,” says Rishabh Goel, Co-founder and CEO, FixMyScore.
Your Credit Mix Is Too Lopsided
Credit profiles can include secured and unsecured borrowing; home and auto loans are examples of such credit. Credit cards and personal loans are usually unsecured. A profile that is heavily concentrated towards unsecured borrowing may not have the same credit mix as someone who responsibly manages different types of credit.
“If a credit file is loaded with a lot of credit cards and personal loans and no secured credit like a car loan or a loan against a fixed deposit, it means the borrower has only handled unsecured debt. A combination of both is rewarded by scoring models, because it shows the ability to handle different types of credit responsibly,” adds Goel.
Too Many Enquiries Are A Liability
When an individual applies for several credit cards or loans within a short period of time, it can result in multiple hard inquiries on their credit report. While a single individual enquiry may have less impact, multiple enquiries can highlight an increased demand for credit.
“The quickest fix is to stop all new credit applications for the next month. For rate comparisons, stick to pre-approved offers or soft-inquiry eligibility checks on lenders' apps and aggregator platforms; these are safer since they don't touch the score,” adds Goel.
Credit History Is Still Too Young
If you have just started using credit, your score may just need time to reflect your borrowing behaviour. The length of your credit history is another factor that is considered in credit scoring. Someone who has managed credit carefully for years has a longer history than a new borrower, even if both have never missed a single payment.
“Average account age counts, and closing an old credit card, even one that's seldom used, can quietly shorten credit history and dent the score. Many borrowers clean up their wallets and close "unnecessary" cards without realising that the length of the file was working in their favour. This can be prevented by keeping the oldest active accounts open, even if they are only occasionally used,” says Goel.
An Error May Be Sitting In The Report
There are times when the reason for a stagnant score is inaccurate for an individual's credit report. Errors can include outstanding balances, duplicate accounts, and wrongly reported payment statuses or enquiries you didn’t raise.
“Downloading credit reports and checking every entry against personal records is the starting point. RBI mandates that credit bureaus resolve disputes within 30 calendar days of filing (21 days for the lender to send corrected data, plus 9 days for the bureau to update it) and if that deadline is missed, the borrower is entitled to Rs 100 per day in compensation,” suggests Goel.
It becomes important that one pays their dues on time and maintains a healthy credit profile; however, it is only a small part of deciding credit health. If your score isn’t changing, you should examine your credit utilisation, credit mix, recent enquiries for loans and credit cards and past transactions.
