Why your credit score is not improving despite timely payments: Know more

Each time you take a new credit card or loan or look to refinance an existing loan, the new lender checks about you

People are flummoxed when they make loan and card payments on time but their credit score does not improve. It prompts many to question why their responsible financial behaviour isn't improving their creditworthiness.

 “I have been paying all my bills on time for the past two years but my CIBIL score has barely moved. It's disheartening and confusing,” says Arun Kumar, a 30-year-old information technology professional in Gurugram.

Factors contributing to credit score stagnation

High credit utilisation:

It is calculated by dividing the amount of credit used by the total credit limit available. If you have a limit of Rs 10,000 and you use Rs 8,000, your credit utilisation ratio is 80 per cent. Experts recommend keeping the ratio below 30 per cent to maintain a healthy credit score. A high utilisation ratio can reduce credit score.

 

Limited credit mix:

Credit mix, or the diversity of credit accounts, is another important factor in credit score. Having a mix of different types of credit, such as a home loan, personal loan, and credit card demonstrates your ability to manage debt. A lack of credit diversity can hurt your credit score.

Multiple credit applications:

Applying for multiple credit cards or loans within a short period can affect credit scores too. Each application prompts a credit company or lender to check your finances and this can lower the score by a few points.

Errors in credit reports:

When reviewing your credit report, check that it contains only items about you. Be sure to look for information that is inaccurate or incomplete. It's crucial for consumers to regularly check their credit reports and dispute any errors they find.

Co-signing loans:

Co-signing a loan can also pull down your credit score. When you co-sign a loan, you are taking on the responsibility of paying the debt if the primary borrower defaults. This can increase your debt-to-income ratio and lower your credit score.

To improve your credit score, consider these key steps:  

Pay bills on time

Maintain a healthy credit mix

Reduce credit card balances

Limit new credit applications

Check your credit report for errors

How Credit score is calculated

Payment history: Your record in making on-time credit card payments, loans, and bills. Late or missed payments can lower your score.

Utilisation ratio: Keeping it below 30 per cent is ideal for a good score.

Length of credit history: The age of your oldest and newest credit accounts. Longer credit histories typically lead to higher scores.

Credit mix: The variety of credit accounts you have, such as credit cards, loans and mortgage. Having a diverse credit mix can improve your score.

New credit inquiries: Each time you apply for new credit, it results in a hard inquiry that can slightly lower your score, at least temporarily.