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How to Improve Credit Score for Two Wheeler Loan

October 16, 2024

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Your credit score determines your creditworthiness. When you apply for loans, banks and financial institutions review your credit score to check whether you’re eligible to avail a loan – it’s considered one of the most important parameters while evaluating your loan application. Having a poor or below average credit score either leads to rejection of loan application or high-interest loans. If you’re planning to apply for a two-wheeler loan, you may consider evaluating your credit score first.

In this blog, we have shared a few tips and strategies that may help in improving your credit score.

What is a Good Credit Score?

Credit scores range from 300 to 900. Any credit score above 750 is considered as a good credit score while any score below 600 is considered as below average score. You should always strive to maintain financial discipline to keep your CIBIL/credit score above 750.

Ways to Improve Credit Score for Two Wheeler Loans

1. Obtain a Credit Report

Before embarking on any credit improvement journey, start with a clean slate by obtaining a free credit report from TransUnion CIBIL, Equifax, Experian, or CRIF Highmark. Review the report for inaccuracies or missing information that might negatively impact your credit score. Errors in your credit report, such as incorrect payment histories, can lower your score.

2. Keep Your Debts on the Lower Side

Your existing debt burden can significantly influence your credit score. Banks often prefer borrowers with low outstanding debt, as it reflects responsible financial behaviour and a higher capacity to handle new debt. To improve your credit score for a two-wheeler loan, prioritise keeping your debts low. Additionally, timely repayment enhances your credit score and establishes a positive credit history.

3. Aim for a Lower Credit Utilisation Ratio

Credit Utilisation Ratio (CUR) refers to the percentage of credit you have utilised out of your available credit limit. A higher CUR indicates heavy reliance on credit and poor financial management, deterring banks from offering favourable loan terms. Aim to keep your CUR below 30%. This can be achieved by reducing credit card balances and avoiding maxing out your cards.

4. Execute Disciplined Repayment

A prominent factor in determining your creditworthiness is your repayment behaviour. Banks scrutinise your credit report for timely repayments on loans and credit cards. Consistently paying your EMIs and bills on time are signs of reliability and lowers the bank's lending risk, potentially leading to loan approval under favourable terms and conditions.

5. Resist Re-Applying in a Short Span

Facing rejection on your loan application can be discouraging, but try to avoid applying for credit with multiple banks in a short period. Each bank's inquiry results in a hard inquiry on your credit report, which can temporarily lower your credit score. Frequent applications suggest you are credit-hungry, making you appear riskier to banks and affecting your credit score.

6. Maintain a Good Credit History

Your credit score is based on your credit history. It not only takes all your EMI and credit card repayment behaviour into account, but also includes details such as the amount borrowed, current debts, any defaults or late payments, etc. A positive credit history can help you qualify for two-wheeler loans without much hassle.

Final Thoughts

Having a good credit score simplifies your two-wheeler loan application journey. Banks prefer customers with higher CIBIL scores. Rectify credit report errors, keep your debts low, maintain lower credit utilisation ratio, repay on time, and avoid frequent re-applications, to keep your score healthy.

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FAQs

1. How long does it take to improve my credit score?

Improving your credit score is a gradual process that requires consistent efforts over time. Depending on the specific actions you take, it may take several months to see significant improvements in your credit score.

2. Can paying off a loan early improve my credit score?

Clearing credit card dues to maintain a healthy credit utilisation ratio can help enhance your score. But, paying off loans early? Unfortunately, not. Most credit bureaus consider your open accounts to measure how well you have been managing your debt. A closed account results in reduced credit history and does not have a positive impact on your credit score.

3. Will closing unused credit cards improve my credit score?

Closing unused credit cards may not necessarily improve your credit score. In fact, it could potentially harm your credit utilization ratio, which is an important factor in determining your creditworthiness. It's generally advisable to keep unused credit cards open to maintain a healthy credit mix and limit any negative impact on your score.

4. Can I check my own credit report without affecting my score?

Yes, you can check your own credit report without affecting your score. This is known as a "soft inquiry" and does not have any negative impact on your credit score. It's recommended to review your credit report regularly to stay updated on your financial health.

5. Are there any quick fixes to improve my credit score?

There are no quick fixes when it comes to improving your credit score. It requires consistent efforts, responsible financial behaviour, and time to see significant improvements. Be wary of any fraudulent claims or credit repair companies promising instant improvements.

6. How can rectifying mistakes on my credit report improve my credit score for a two-wheeler loan?

By rectifying mistakes on your credit report, like disputing incorrect payment histories, you can improve your credit score for a two wheeler loan.

7. What are the best practices to follow for credit card dues and EMI payments to improve credit score?

Set reminders or use auto-debit instructions to avoid missed payments. Money will be automatically debited from your bank account on the due date. This will ensure timely repayments and help in keeping your credit score in check.

8. What impact does the credit utilisation ratio have on my credit score?

Keep your credit utilisation ratio below 30% to improve your credit score. A higher ratio may imply that you haven’t been able to efficiently manage your finances or you have been making impulsive purchases on credit. This increases credit risk for the borrower and may result in decreasing credit score.

9. How can timely repayments help?

Timely repayments show that you are a responsible borrower who can effectively manage finances. Set reminders or use auto-debit to ensure on-time repayments.

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