The secret of a good credit score

There are more ways to build a good credit score than just paying your dues on time. A simple yet effective way is to make sure that you do not use the full credit limit available to you. A credit score is a three digit number that is an indication of the creditworthiness of an individual.

Lower utilisation of credit limits is the second most important factor when assessing credit scores. "The total unsecured credit usually also has a bearing on the credit score of the customer. The full utilisation of limits may impact the scores,'' says Mohan Jayaraman, managing director, Experian Credit Bureau, India.

Thus, if you have a credit card, make sure you do not max out the card. For instance, if you have a credit limit of Rs 2 lakh on your card, make sure you do not use the full Rs 2 lakh credit limit. Use the card in moderation.

The idea is that you should not appear as desperate for money. "If a customer maxes the credit card limit, the customer is seen to be in need of credit (may be financial stress) and perhaps may not be able to pay it back in full,'' says Kalpana Pandey, CEO & MD, CRIF HighMark Credit Information Services.

Of course, the best bet for earning a good credit score is to pay your credit card dues, bills and loans on the due dates. "Typically, a credit bureau assigns the highest weight to an individual's past payment record; credit exposure is a close second,'' says Manish Sinha, India country leader, Equifax.

Credit bureaus take into account various factors to assess a customer's borrowing behaviour. The actual weightages differ across the bureaus. "Typically the following rough weightages are considered in making up a bureau credit score: (a) Payment History -- 35% (b) Total credit - 30% (c) Length of credit history - 15% (d) New credit - 10% (e) Demographics - 10%,'' according to Jayaraman.

Other factors that impact the credit score are repayments over last 36 months as also any write-offs or forced settlements. "Credit mix in terms of secured versus unsecured loans, how long customer has been on the credit bureau, and how credit hungry the person is, also influence the credit scores,'' says Pandey.

Thus, even your credit enquiries matter. So don't go shopping for a loan if you not really interested. "Limit your enquiries for loans or credit cards. Searching for new loans/credit cards indicates a greater chance of increased levels of debt burden, thereby increasing the possibility of a default in repayment,'' says Sinha.

It is advisable to use credit cards smartly to one's advantage. For instance, if you don't have a credit history, then it is advisable to take a credit card and use it smartly to build a credit history and to get a score.

But unused cards do not add any value to your scores. Remember, to close any unused credit cards. "Unused cards are viewed as existing possible debt,'' advises Sinha, Equifax.

In case, you have a bad score in the past due to a default or an overdue, you can still change your score. "A credit score is a point of time information and will change if your credit report changes. If the customer settles the overdue loan, then the score should begin improving over time,'' says Pandey.

Your credit score could also be impacted by the borrowings of your friends and relatives if you have signed up as a guarantor.

In India, the Reserve Bank has prescribed the score to range between 300 (lowest) and 900 (highest). ``While the scores themselves may differ across the bureaus, typically a good credit score would be above 700,'' says Jayaraman.