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
· Credit Rating Information Services of India Limited (CRISIL)
· 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