Increasing your Credit Score
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four bestselling books on Personal Finance.
20 Jul, 2017
In a time when virtually everyone is applying for a loan for one purpose or another, maintain a healthy credit score is becoming increasingly important.
Credit score is a three-digit number which reflects one’s creditworthiness. Calculated by credit bureaus, one’s credit score is based on the data made available to them by lending institutions every month. The score reflects one’s track record in handling credit.
A good credit score ensures that any loan you apply for gets sanctioned quickly and that the best possible interest rate in the market is available to you. At a time when almost every single household is applying for some sort of loan; education, car, personal, home or credit cards, a high credit score can translate into lakhs of rupees being saved in interest charges.
Prior to applying for any loan, you must apply to one of India’s four credit bureaus-CIBIL, Equifax, Experian or Crif Highmark. This should be done to find out your credit score and gain a credit report. On an average, credit scores range from 300 to 900. The gradation moves along the following scale.
- Above 800- considered to be excellent
- Between 750 and 800- considered to be good
- Between 700 and 750- considered to be fair
- Between 650 and 700- considered to be poor
A majority of the loans are offered to people whose credit score is higher than 750. In case your credit score is lower, it is best to try and improve it before applying for a loan.
Here are some of the criteria that credit bureaus use to determine your score:
- Payment history
- How steeped are you in debt?
- Credit history
- New credit
- Types of credit
Maximum primacy is given to one’s track record in repaying loans by credit bureaus. Late payments and the duration of delay is a major factor considered. Weightage is also given to whether the infractions are recent or have happened a while ago. Bureaus also look into the type of loan you have defaulted on; defaulting on a secured loan such as a home loan sits at the top of the list of sins one can commit.
The extent of the available credit limit that a person uses is scrutinized by credit bureaus. They look at how steeped in debt the person is and what portion of the debt he has managed to pay off.
As credit bureaus don’t have adequate data to assign a score, borrowers with no credit history tend to get a poor score. A longer credit history is looked at favourably by credit bureaus as it provides them an insight into how responsible a person is with respect to handling credit.,/p>
Borrowing sprees are looked down upon by credit bureaus, attributing it as a marker of deteriorating credit.
The type of credit taken by an individual in the past also influences decisions made by credit bureaus. Over-reliance on unsecured debt, like in the case of a personal loan or credit cards would count against an individual.
- Review your report
- Resolve past mistakes
- Create a credit history
- Develop a good mix of credit
- Make use of credit prudently
- Don’t display credit hunger
- Get errors rectified
- Don’t pay for other’s sins
In case you are planning to apply for a loan in the near future, reviewing your credit report at regular intervals is a good idea. As per expert advice, credit reports should be reviewed as frequently as once a month or at least once a quarter. Regular reviews give an indication of which area one has a scope to improve in.
Defaulting on loans can occur due to a variety of reasons; leading a spendthrift lifestyle, loss of job, illness. At times, people default simply because they don’t understand or appreciate the ramifications of their actions. Credit scores could plummet, causing all future credit market activity to cease. Remedial actions are include creating a budget and sticking to it diligently or informing the bank about any monetary difficulties and asking for a revised payment date, thereby reducing the EMI and extending the loan tenure. Playing truant once you have already defaulted on a loan is the last thing one should do.
If any loan product hasn’t been used in the past, your credit score will be poor. Hence, contrary to age old wisdom, loan products should be put to use right from the time you start earning. Making use of them in a responsible manner will help in building up a sound credit history and will come in handy when applying for a big loan such as a home loan.
A healthy mix of credit aids in assembling a good credit score. This can include creating a mix of unsecured and secured loans, instead of depending massively on one category.
As long as the sum of your EMIs does not exceed 50% of your take home salary, most banks are open to giving you a loan. But taking debt NEEDS to be a well thought out activity. If interest rates rise, you EMIs will increase, leaving you in a difficult position. Hence, one must stick to a prudent limit of restricting all EMI and credit card payments to 30% of your take home salary.
If you make use of credit cards, it’s best to curtail its usage up to 40% of the credit limit allowed on the card. Applying for bank loans should also be avoided within a limited time period. This is because, every time you do so, your credit health undergoes a check-up by institutions and every such enquiry results in lowered credit score.
Low credit scores can, at times, be a result of errors in the records of lending institutions. A loan might have been paid off but its records might not have been updated in the lender’s books or you might have become a victim of identity fraud. Such errors come to light only when a credit report goes through. Thus, it is highly important that the report gets checked for discrepancies and they get rectified at the earliest.
Avoid being a victim of other people’s financial indiscretions. Other than if the person is really close to you, like your spouse, don not become a co-borrower in a loan. Likewise, do not become a guarantor. This is so that you aren’t not liable to make payments in case the borrower defaults. If you fail to pay the money, your credit score could take a hit.
If you adhere to the tips suggested above, your credit score will improve in due course. Not only will lenders vie to lend to you (offers of pre-approved loans will flood your mail inbox), you will also be able to avail of the most attractive interest rates in the market.