How Self-Employed People Can Improve their Credit Score
Loan applications of self-employed is not considered as secure and regular income employment. Hence to build up a good credit rating is not an easy task for self-employed individuals.
If you’re self-employed and want to borrow money, you’ll have to put in efforts in building a good credit rating, else availing funds for your business will be serious trouble.
It is important to understand how do ratings work and how to make your own ratings workable to get funds.
What is considered a good credit score?
Credit bureaus generate a CIBIL report for each individual. The CIBIL score ranges between 300 and 900. A higher score of above 750 is considered to be a good one. A score between 300 to 549 is considered to be poor, a score ranging from 550 to 700 is considered fair.
You should take immediate and conscious measures to improve the credit score if it shows signs of the discrepancy. When regular payments are done and on time, with time the score improves to the desired range.
How does credit score works?
A credit score is a powerful score that helps a lender determine a borrower’s creditworthiness. Lenders consider a credit score to decide whether it is worthy to lend funds to a certain borrower or not. The better your score, the higher chances of securing a loan at a low-interest rate.
A credit score is a 3 digit number that is used to rank a borrower's credit risk. A healthy credit score is considered good and low at risk. While different lenders have laid down different guidelines for a credit score, the general criteria lay for a score above 700 for approving a loan application.
How to build a positive credit history?
Building a positive credit rating is very important. For self-employed individuals achieving a balance in preparing a budget, and staying by it consistently will lead you to a secure path. Ensure to keep your budget that has a balance. Pay off all on time.
One important aspect of showing stability in income flow is to prove you’re living within your means. Create a saving fund to manage during hay days. Always set aside some money for taxes as well.
Additionally, owning a house or apartment is an add on for establishing security while availing the loan.
Possible hindrances which can harm your credit ratings
While planning to avail loan it is important to understand what affects a credit score. There are multiple factors that impact your credit score. Two major factors are the amount you owe (whether you’re near the credit limit), and the payment history (whether all loans were paid on time and if payments are on time). Unless there are any major issues of bankruptcy, minor factors have a lesser impact.
Still, it is advisable to keep everything clean and stable. It is a good idea to keep checking the credit score regularly and take measures to rectify.
Set reminders for payment and be disciplined with credit
When it comes to paying EMIs, it should always be planned ahead in time so that there is no delay. Late payments force one to pay penalty and also lowers the credit score. So, if for any reason the payment is missed or delayed, set reminders to pay them on time. It will create a significant impact on the credit score.
Shorten your credit limit
Take immediate steps to limit the usage of credit. Do not stretch the usage till the last available limit. It will portray you as credit hungry person and will severely impact the credit score. Check with your credit lender and shorten the credit limit.
Avoid taking too much debt at a time
Do not apply for too much credit at a time. If funds are required, first close one loan and then take another one. Availing multiple loans at a time will create a chain of insufficient funds. This has a negative impact on your credit score, thereby dropping it at an alarmingly low score. It will not be a good sign for the lender when reviewing the loan application.
Select a longer tenure while availing a loan
Choosing a longer tenure while availing a loan will keep your EMIs low, thereby reducing the burden of monthly repayment. This will help repayments on time, making the moves in the right direction. It will improve the credit score drastically.
Build credit history by choosing different forms of credit
Maintain a mix of credit of both secured and unsecured loans, of a short and long tenure in building a strong credit score. It will help you get attractive interest rates and higher loan amounts when you wish to seek funds in future years.
Monitoring joint accounts
It is important to monitor repayments made to loans where the customer is a joint account holder. A borrower is equally responsible for making EMI payments on joint loans which will have an impact on the credit score. It also applies to the guarantor of the loan.
Maintain older credit cards to lengthen credit history
Keeping the old credit cards have an added advantage in building a strong and lengthy credit history. Keep it as long as it is not hampering your budget will turn it into a healthy score building factor.
Pay all debts on time
The most effective way to improve a credit score is to pay the debts on time. You must note that if you don’t make EMI payments on time, nothing can help you improve your credit score. Hence, timely payment should be your priority.
How to apply for credit
When you are in need of funds it will benefit you in building good credit. Getting approval for loans is a little stricter, hence having a healthy credit will simplify the procedure.
First, you should make sure your credit rating is good. Then comes the documentation part. Comparing and carefully analyzing the interest rates with the lenders will help make an informed decision. Use a loan EMI calculator and take the necessary steps in choosing what is best for you.
By implementing these practices, your credit score will improve. It will not happen at once but by the end of the third and fourth month, you’ll begin seeing the difference. After implementing the steps in the right manner it may take around 6 months to a year for your credit score to improve.
You’ll have to work towards your finances to keep in good order and work on things that will facilitate in building a good score for you.
When the credit is in a good position, applying for a loan will be a smooth ride.