The Reserve Bank of India has mandated that all banks should check the credit score of every loan or credit card applicant at the time of evaluation. While each lending institution uses different parameters to assess your creditworthiness, a credit score is a basis to determine the eligible loan amount.
The credit report or score is a document that highlights your entire credit history.
This score is offered by a few organisations in the country. This includes CIBIL (Credit Information Bureau India Ltd), Equifax, Experian and CRIF High Mark. The popular one is the CIBIL score, considering the organisation’s tie-up with various financial institutions and other online platforms.
That’s why many often associate credit scores with CIBIL scores.
Credit report includes details of your personal information, contact information, employment history, credit limit on various credit cards, credit balances, and dates on when you opened various accounts.
This report is viewed by various lending organisations and Government entities, if you are looking for a loan.
If you need to increase your credit score, it won’t happen overnight. Credit scores take into account your past behavior regarding your credit report, and not just your present actions.
But here are a few suggestions that you as an individual can follow to start on the path to better credit.
The need to improve the score will arise only when your CIBIL or credit score is low and you are planning to apply for a new loan or a credit card for your future endeavors.
The first thing you should be doing before you plan to go for any loan is to check your Credit score or report regularly. These are available across many platforms including CIBIL, Equifax, Experian and CRIF High Mark. These organizations offer a certain number of free credit score for a month or for a year. Alternatively, you can check any other online lending institutions’ or NBFCs’ websites too for a free credit report.
Checking your Credit Report is a good idea because it will tell you two things that are absolutely critical to your credit score.
First, it will show the defaults or delayed payments that has brought down your credit score.
Second, it provides information supporting the reason behind the low/high credit score. This helps in fixing the credit score. You can approach the bank to get the situation corrected.
Ideally keeping your credit score above 750 is considered to be good, rather essential. But it could vary with the credit score organisations as well as each banks’ benchmark.
So if your credit score is low, then it is time to start rectifying it.
Spend as much amount as you can repay within the billing date if you have any loans or credit cards outstanding. Such unpaid dues or balances on credit cards pull your score down. Paying off this amount will positively reflect on your CIBIL or credit score.
Talk to your lender and negotiate to close your loan account at the earliest.
Also, it is better to have just one or two credit cards so that it becomes easier for you to keep track of repayments.
Make sure you dispute errors immediately on www.CIBIL.com after reviewing your CIBIL report or if you disagree with a particular transaction made through the vendor. Alternatively, you can check CRIF High Mark or Equifax.
As mistakes can happen from any side. Even lenders can also make errors at the time of data entry. It is compulsory for any financial institution to act on those disputes within 30 days. Once the error is resolved, it will show improvement in your CIBIL or credit score.
Do not apply for new credit without resolving old issues, it will affect your score.
Many of us believe that if there is no debt in the books, then it is good for credit score.
Without any history of loans, there is no way for the lender to assess your ability to repay loans in the future. Therefore, use your credit card now and then (only if necessary) or go for a loan (if required) and pay the dues on time. If you have sufficient financial strength, go for a short-tenure loan. So your repayment is easy.
Also, many of us believe that old debt accounts that we are not using any more should be closed. While it may not be possible, you should note that, it is also a cause for a low credit score.
Good debts are the debt that you’ve handled well and paid in accordance to agreed terms. Good debt is good for your credit rating. The longer your history of good debt is, the better it is for your credit or CIBIL score.
If you are intending to make a big purchase like a car, home appliances or a home, ensure that you are not behind in repaying your credit card EMIs and bills on time. This is one of the important things that CIBIL or other credit scorer looks into while gauging your credit ratings.
Even if you have huge savings, a drop in CIBIL score can shatter your dream of owning a home or a car in the future. Timely payment of EMIs and bills can keep your creditworthiness intact.
Calculate your Loan EMI here: EMI calculator
Sometimes, one of the best ways to improve your credit score is to not do something that could risk it.
Two of the biggest risk that you can take is missing payments and suddenly paying less than you normally do.
Other changes that could scare your card issuer are taking cash advances or even using your cards at businesses that could indicate current or future money stress, such as a pawnshop or a divorce attorney.
You just don’t want to do anything that would indicate risk for your creditworthiness.
Although your credit report does not include information about your payment of utility bills (electricity, water or gas) or phone bills (home, mobile, and internet) in general, it is important to pay these bills when they’re due.
If you don’t make a payment on these services in due time, your credit provider may refer your debt to a debt collector or report your debt to a credit reporting agency, asking them to record the default on your credit report.
Try not to use your credit card for everything. It is better to keep the credit utilization ratio of a credit card up to 30% or lesser.
By doing this, there will be a positive impact on your CIBIL or credit score. Keeping your monthly due balances low will reflect a healthy CIBIL or credit score.
When you ask your bank to raise your credit limit, particularly for credit cards, it does not necessarily mean that you get a chance to spend beyond your means. This increase in credit limit can have a number of plus points if you manage your credit wisely.
You have a lot more credit available at your disposal, and if you keep your credit utilization low, it will have a positive impact on your CIBIL or credit score.
Having said that, please ensure you don’t spend beyond your repayment capacity.
This is actually a situation where you could suffer even if you are not at fault end.
In such a scenario, if you are the joint application for a loan someone else has taken, and they have defaulted on payments then you too will lose out on your CIBIL or credit score as it will reflect in your report too.
The best way to avoid this is to ensure that the loans and cards are being paid for on time and limit yourself to applying for joint credit terms.
With banks and other lending agencies opening up in every town and city of India, one might think that getting money will become easier, but this might not always be the case.
Given the kind of risk involved in lending, almost all financial organizations rely on certain criteria to gauge the repayment capacity of an individual or a business entity.
A credit score is perhaps the single biggest determinant when it comes to you availing of a loan, which makes it critical for us to maintain our credit scores.
As mentioned, CIBIL is the popular credit rating bureaus in India and adopted by most banks. Its score act as the first impression of the applicant in front of the credit lenders.
Not only does a good score improve our chances of getting a loan/credit, but also helps us get a better interest rate from lenders.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.
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