Do you know credit score or a credit bureau is something that’s all Greek to a lot of Indians? Don’t believe us. Take the recent findings of a survey that says as much as 85% of respondents are ignorant of what a credit bureaus is. That’s not all. A staggering 92% of those surveyed didn’t know their credit scores.
These numbers are not just part of a survey. In actual world, there are a lot of borrowers who apply for a loan (whether home loan, personal loan, credit card, 0% finance schemes) from a bank or any financial institution without checking their credit score only to find their application rejected — simply because they have a low credit score and have a tainted credit history. Although your credit score is not the only parameter that banks or lending institutions consider while evaluating your loan application, but it is one of the critical determinants.
So what lies at the base of a credit score and how to improve one’s credit history? In plain words, your credit history that decides your credit score is maintained by a credit information company (CIC), also called a credit bureau. Your credit history begins from the day you start using your credit card or borrow from a bank that could accesses your credit score from one of the credit bureaus. The basic objective of financing institutions is to evaluate the risk profile of you as a borrower and to assess your past credit behaviour.
There are four CICs or consumer credit bureaus in India, namely Credit Information Bureau (India), popularly known as CIBIL; Experian Credit Information Company of India; Equifax Credit Information Services and High Mark Credit Information Services. Credit bureaus in India are regulated by per the Credit Information Companies (Regulation) Act 2005, as per which a CIC or a credit bureau is allowed to collect information about a customer’s credit performance from a bank, NBFC or a financial institution.
Your credit score is a three-digit-number — the higher you score the better is your repayment history of previous loans/credit cards and financing institutions consider you less risky than the one having a low score. In case of CIBIL, for instance, the CIBIL TransUnion Score is a 3-digit numeric summary of an individual’s credit history. The score ranges from 300 to 900 points. The closer the individual’s score is to 900, the more favourably the loan application will be viewed by a credit institution.
“Your credit score is based on the information provided in your credit information report (CIR). Higher the score, the more favourably it is viewed by banks and financial institutions. Things like delay in credit card payment, enormous number of credit enquiries, delay in payment of EMIs, etc. can affect credit score,” says Mohan Jayaraman, Managing Director, Experian Credit Information Company of India Pvt. Ltd. and Country Manager, Experian India.
How To Improve It
As it turns out, a credit score is beneficial for both the lender as well as the borrower. Since every loan whether home loan, car loan, personal loan and even credit cards, carries some amount of risk of default, the credit score gives lender a fair idea of your risk profile. Here are the steps you could take to avoid getting a loan application turned down just because you have had a poor credit history.
The foremost thing you must take care of is pay all your dues on time. “Not paying your loan EMIs or defaulting on your credit payments critically hampers your credit score. Always ensure that you pay your loan EMIs on time,” says Harshala Chandorkar, Senior Vice President – Consumer Relations, CIBIL. (See Secured loans weigh higher)
Adds Jayaraman of Experian Credit Information Company, “All repayments – and missed ones – are recorded on your CIR. Missed payments and high outstanding amounts negatively impact your credit history and credit score. Pay your EMIs and credit card dues on time and as agreed to the lender.”
Secondly, be in control of your finances if you have taken joint loan. For, any slippage on the part of the co-borrower would not only make you equally liable for default it would also negatively impact your credit score and hamper your chances of getting further loan or a credit card.
Further experts say making multiple credit inquiries for loans, having a skewed account mix towards unsecured loans and having high credit utilization also negatively impact your credit score
.Don’t Be Hungry For Credit
If you thought paying your debt will increase your score, or cancelling credit cards will boost your score, you’re wrong. “Credit history is calculated over a period of time and is not a snap shot at moment of time. Thus paying debt will not instantly improve the score,” says Rajiv Raj, Co-Founder & Director, creditvidya.com. “In fact if you close credit card having longer credit history it will have adverse impact on your score,” he adds.
Similarly, the belief that past settlements/write off will not impact your credit score is another big myth people harbour. “The derogatory information will remain in your credit file till the time you complete the payment. Even though it may not impact score but lenders will reject your loan applications,” points out Raj.
So next time you step in a bank or a lender’s office, make sure to check your credit score first.