How to improve my credit rating?

 

Having a good credit score plays an important role in your financial life as this determines your credit worthiness. This helps the lender or the bank to assess the credit risk of a prospective customer by predicting their ability to repay the debt.

The 3 digit number that determines your credit score practically becomes your identity to the bank while you plan to borrow money. The credit score reflects the potential borrower’s past and present financial behavior which further helps the lender determine if you are a low credit or high credit risk customer. Having a low credit score has an impact on the application decision when it comes credit lines, loan amount etc. This could also make borrowing a difficult scenario in case you have an emergency financial requirement.

Building a good credit score takes time. It is important one understands what steps to take to maintain a healthy credit score. The Credit Bureau collects data on your financial history and scores you accordingly. In case of late payments on EMI or defaulting, the data gets recorded which eventually plays a negative role in your credit ratings. On the other hand, when a person has a good credit history, he might get rewarded by having to pay lower interest rates on loans.

As important it is to gain good credit, it is equally important to maintain it. Your credit score can manipulate certain situations in your life. As some potential employers may refer to it as an assessment metric and conclude if you are a right fit for the organization. Insurance companies also check the credit score as an indicator to set premium.

Amidst all the things that we need to worry about, how do Rating Agencies keep a check on our credit rating? It’s not all that difficult to attain.

Firstly, to understand your credit rating one must get a copy of their own credit report. The report gives an exhaustive picture of their credit history. It shows the payments made over the last two years plus any payments that are outstanding or overdue. One can also check for the records of any missed or defaulted payments in the past.

Having this report handy enables you to judge your expenditures and lets you decide where to draw a line. This way it becomes easier to manage finances and you can reduce or completely eliminate the act of defaulting to make your credit score better over a period of time.

Here are a couple of simple and easy steps you can take to maintain a good credit score and use it to your benefit:

1)  Timely payment– Missing or delaying a payment beyond the due date is a trigger for the rating agency to score you low. Sometimes you can be tempted to pay just the minimum amount due on your credit card as this is a temporary relief on your monthly financial obligation. This increases the length of time required to pay back the actual debt and may have implications on your credit score. Paying off a higher portion of your credit card debt will lower the debt burden ratio and eventually lead to improving the credit score. Banks feel assured that you can manage your money smartly and you appear to be less of a risk while borrowing money.

2)  Manage your credit cards well– it could be a great lifestyle statement to own several credit cards in your wallet with high credit limits. This can’t be termed a bad practice as it alone does not damage your credit score. What counts is the way you manage them and under what circumstances you obtain them. Multiple credit cards mean a higher sum of total credit limit and this goes towards adding to your debt ratio irrespective of outstanding balances. Cancellation of credit cards to avoid bad credit would not help because it shortens the credit history. Banks deduce you as a risky borrower when they are unable to see your long term credit history.

Keeping a good credit rating and maintaining it is not an unachievable feat. With good financial habits, one can achieve a high credit score. A good credit behavior is often a lifestyle choice. There is no formula.  But losing your financial health can set you back by a long margin. The journey to correct it can be a tedious and lengthy one. Being punctual with finances will yield a good credit rating score.

UAE uses Al Etihad Credit Bureau. You can get a copy of your credit report by visiting one of the Customer Happiness Centers by providing an Original Emirates ID card and passport copy. There is a nominal charge for the issuance of the report. For locations please visit Al Etihad Credit bureau website.