When you need a significant amount of money and have to apply for a loan from a bank, the bank looks at one critical factor - your 'credit'. Depending on your credit score, your loan interest rates could range from 5% to 20% or more.
So, how can you raise your credit score? The answer is simple: borrow money wisely and avoid risky debts.
There is no magic trick to instantly boost your credit score, but just like any strategy, credit score management requires careful planning and consistent effort to see improvements over time.
Maintaining your credit is akin to managing your health, so let's explore some effective methods:
From 2021, the credit rating system has shifted to credit scoring.
1. Adjusting credit card limits is crucial
Whether you choose to pay in installments or in full, it doesn't make much difference if you pay your credit card bills on time. Credit card companies do not label someone as financially unstable just because they choose installment payments.
Since installment payment options are common for all income levels, from high to low, what matters is whether you are using up your credit card limit to its full capacity.
For instance, if your credit card limit is 2 million won, and you almost exhaust the entire amount, it is considered a risky situation. However, if your credit limit were 4 million won, using 2 million won would not be a cause for concern. The key is not maxing out your limit and using only 30-50% of the provided credit limit. This responsible usage can have a positive impact on your credit score.
2. Avoid discarding old credit cards
The number of credit cards you possess does not directly impact your credit score. However, if you wish to reduce the number of credit cards you hold, it is better to cancel the recently issued ones.
Old credit cards have a long history of well-managed repayments, and when you cancel them, this positive credit history is lost.
3. Consistently use your debit card
Using both a credit card and a debit card together might lead to misconceptions about reducing credit card usage in favor of the debit card. However, as mentioned earlier, adjusting your credit card usage to match your credit limit can benefit your credit score.
Using your debit card wisely can be helpful in boosting your credit score. Regularly using your debit card for transactions above 300,000 won for at least six months can earn you 4 to 40 points on your credit score.
4. Use overdraft limits wisely
If the overdraft limit of your bank account remains significantly high for three months, credit rating agencies may interpret it as a high risk of default and negatively affect your credit score.
Hence, it is advisable to keep the overdraft limit at 30-40% of your actual overdraft usage. Using less than 30% of the limit and paying it back within three months can be beneficial for your credit.
5. If you must use credit loans or cash services, opt for a lump-sum withdrawal
Credit card loans or cash services might negatively affect your credit score if you use them often and for small amounts. In such situations, credit card companies might perceive it as risky behavior and lower your credit score.
If you must resort to these services, it is better to opt for a lump-sum withdrawal. Although you might have to pay more interest initially, it can be more beneficial for your credit score in the long run.
In conclusion, there is no instant fix to improve your credit score; it requires consistent and responsible financial management. Just as you would prioritize your health, take the necessary steps to manage your credit wisely and watch your credit score rise over time.