The word credit score gets thrown around a lot
in banking circles. Your credit score is basically a number that determines
your creditworthiness or your ability to repay a loan. It is a three-digit
number ranging from 300 to 900 and an ideal credit score should be around the 750+ mark. It is representative of your credit
history and repayment patterns. When you apply for a personal loan or you apply
for an online loan, the lending agency, be it a bank or an NBFC, they will use
your credit score to ascertain your worthiness. It is therefore important to
have a decent credit score if you need a loan. Your credit score is the biggest
factor that determines your financial integrity. Generally, a credit score
upwards of 700 is considered excellent but eventually, it is up to the lender
to determine your eligibility for taking a loan or a credit card.
Good financial discipline is necessary for a
good credit score. Even if you are applying for a small loan online, your
credit score will be considered, it is therefore advisable to keep a decent
credit score. Every time you apply for a loan, the potential lender will go
through your credit score in the past six months to determine whether you are a
good borrower or not.
It is a
test of your financial discipline and your credit score is indicative of that.
Almost all lending agencies will consider your credit score and credit limit
before extending a loan or a credit card.
Your Debt to Income ratio is also a major
factor when it comes to determining your credit score. Lenders generally
discourage people from taking debts more than 40% of their income so basically
your earning is the metric on which your Debt to Income ratio is based. It is a
very precise method of ascertaining your ability to repay a debt and lending
institutions keep track of it.
If you have too many previous loans or debts
in your name, it will discourage lenders from giving you a loan and thus
negatively impact your credit score. The inability to repay a debt especially
in the case of unsecured loans is a huge red flag and it is always better to
clear your previous loans before applying for a new one.
All of the above-mentioned factors affect your
credit score and the best way to improve your credit score is to be responsible
with your finances. Repaying your loans on time and keeping track of your
credit reports is a good way of improving your credit score. Maintaining a
diverse credit range which includes both unsecured and secured loans will also
help and proves that your are quite capable of managing your finances. A
tendency to lean towards unsecured loans can be detrimental to your credit
score. Discarding unused credit cards and not maxing out on your credit card
will also go a long way towards improving your credit score. You should also
try to avoid prolonging the duration of your loan tenure.
As mentioned earlier, maintaining a decent
credit score depends largely on your ability to manage your finances.
Extravagance and delaying your payments will lead your credit score to drop and
subsequently hamper your chances of getting a loan. Although there are other
credit agencies functioning in the country, CIBIL (Credit Information Bureau
Indian Limited) is the largest and most popular agency and credit score is
often used synonymously with CIBIL score. The other bureaus that manage credit
ratings are:
·
CRIF High Mark
·
Experian
·
Credit Rating Information Services of
India Limited (CRISIL)
·
Equifax
·
ICRA (formerly known as Investment
Information and Credit Rating Agency of India Limited)
Effective financial planning leads to
stability and convenience while getting a loan and maintaining your credit
score is the first step towards long term financial independence.
There are several other factors that affect
your credit score.
Know all the factors that reduce your credit score:
1.
Delay in Payments
In case you have opted for a loan from
a bank, NBFC or a Credit Card, the payments need to be done on a regular basis,
without delaying on the EMIs, as it impacts your score directly.
2.
Minimum payments for credit cards made
for more than 2 months
In case you have a credit card and you
opt to pay the minimum payable amount for more than two months, it is going to
hamper your score. It is advisable to pay the complete bill amount to maintain
a good score.
3.
Credit Card payment or loan Settled or
written off
At times individuals fail to pay the
whole sum of money taken by the Credit Card companies and request to settle
their loan through a one-time payment with a lesser amount. This surely helps
them to settle the loan, but the companies flag such individuals as threat to
other companies and financial institutions as they fail to repay the complete
borrowed amount.
4.
Multiple past loan inquiries with
lenders
Window shopping is to be kept at bay
while looking out for loans as randomly or even actual loan enquiries made in
multitude can raise a red flag for individuals and affect their credibility.
5.
High amount loan inquiries with
lenders
Additionally, if the loan inquiries
are made for high amounts, it may reduce the loan credibility, reflecting that
the person is out of funds and may not be able to pay back.
6.
Utilization over credit limit ratio of
credit card
If a person is utilizing over 60-70%
of the total credit limit on a regular basis, then it comes under negatives for
lending companies, showing that the person is unable to manage the funds.
7.
High credit usage in your credit card
Basis on expenditure pattern of credit
limits, if a person exhausts the limit of his credit card over and over again,
this significantly reduces the score.
8.
Not having mix of the loan type
One shall take the dedicated loans for
each type of transactions, for example, home loan to buy a house and car loan
to buy a car, instead of opting for personal loan for each type of transaction.
9.
Short duration of credit history
If the duration of loan is as short as
4 to 5 months, it doesn’t help in building up the score and results in low
credit score, which at times is as low as minus one.
Ways to make and improve your credit score:
1.
Taking small limit credit card or
small credit line loan as soon as you are eligible. This helps in building your
credit score with time.
2.
Paying the EMI on time in full without
any delays and not opting for minimum payable amount. One may opt for minimum
payable amount once in six months, but not making it a monthly affair.
3.
Using the segregation of loans, as
needed, instead of opting for personal loan from time to time for every type of
requirement.
4.
If you are not able to pay your credit
card payment because of the high amount then its better to take a balance
transfer facility or try to consolidate debt with a personal loan and pay in
easy EMI.
5.
Do not increase your credit cards or
credit line expenditure more than 50% of your total limit in a month
6.
Whenever your banker offers to
increase the credit limit, increase it. This helps in managing your credit
spend ratio, and improving your credit score.
Benefits of good credit history:
1.
Helps in taking bigger loan like home
loans in future with ease.
2.
Easy approval on your loan application
every time.
3.
Increased bargaining power of the
borrower when negotiating on rate of interest