You must have heard a lot of people saying that don’t create a debt or avoid taking loans. However borrowing, if done prudently can also help to build your credit history. Having a good credit history or a good credit score can make the process of obtaining loans or credit cards simpler. Before, we discuss this in detail, let us understand, what exactly a credit score is.

Your Credit Score is a score that is provided by a credit information company (for example companies such as CIBIL, Equifax, HighMark) to a prospective lending institution, that will tell the lender how good or bad a borrower you have been.

 
The clear indication is that the higher your credit score, the better a borrower you are. This means that you probably make your payments on time. Hence lenders that lend to you face a lower risk that you will default. And vice versa - the lower your credit score, the higher the risk that you will default. Remember that if your score is low, lenders might restrict you by charging you a higher rate of interest on a loan or might even refuse to grant you credit.

Having a credit card or a loan on which all the payments have been made on time, may create a good credit history for you and therefore help to improve your credit score. Thus, you may take credit if you really need to. However remember that, taking a loan is fine provided you have the means to service your debt. In other words, you must take a loan only if you will be able to repay all the dues on time. This is very important to ensure that your credit score always remains healthy.

Similarly, opting for a credit card is also not a bad thing, provided you can pay the entire outstanding amount within the due date without any delays. Partial repayments can lead you into a credit card debt trap and also have a bearing on your credit score. However, as a credit card allows us to buy goods and services without paying for them immediately, people often are unable to control themselves from swiping their cards rampantly. Hence, it is very important to use a credit card cautiously and it is always better to avoid owning multiple cards.

Now you might be wondering how would you know what your credit score is. The Credit Information Bureau of India Limited (aka CIBIL) will give you your credit score; you just have to follow the simple steps given on the CIBIL website.

In case you have a low credit score due to poor borrower behavior in the past, you can improve it by paying your dues on time, repaying any late pending dues, and ensuring that you do not default on any payments in the future. It will take time, but small sure steps will definitely raise the score. However, if your credit score is low not due to past indiscipline but due to an error on the part of a lending institution or on the part of CIBIL, do notify both the institution and CIBIL immediately.

If you have fallen into a debt trap, because of which your score is suffering then prioritize repaying your debt obligations first. You can take the help of an expert in this endeavor. There are many credit counseling organisations that can help you fix this situation. These agencies are typically non-profit organizations, so fees are minimal, if there are any fees at all. A credit counseling agency will create a debt management plan for you, aka a DMP, negotiate with the lender on your behalf, and try to get you a lower rate of interest to repay your pending debt. You will also receive some peace of mind, simply knowing that you are not alone in your repayment of debt.

PersonalFN is of the view that you must work hard to improve your credit score to ensure financial safety for yourself and your family. However, remember that although a good credit history can improve your credit score, a loan or a credit card must be taken only if you really require one and have ability to make the repayments on time. If you simply opt for a loan or a credit card and are not able to repay all the dues on time, not only will this ruin your financial wellbeing but also have an impact on your credit score.

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