1) What is a credit score?
Your credit score is a number that represents your creditworthiness, typically expressed as a number between 300 and 900. It is based on your borrowing history — either through credit cards and loans. There are four major credit information companies (CICs or credit bureaus) in India: CIBIL, Experian, Equifax and Highmark.
2) Why should I care about my credit score?
A good credit score could be the difference between getting or not getting a loan at affordable interest rates. Normally, people don’t hear the words “credit score” or “CIBIL score” until they want to take a loan or a credit card. Unknown to them, their credit activity is being reported by lending institutions to credit bureaus, who will assign them a healthy credit score if you have been prompt in your credit card and EMI payments.If you’ve been negligent with your repayments, your credit history report notes it. Additionally, media reports revealed that e-commerce companies and even recruiters are now checking credit scores as part of their background check of prospective employees.
3) I need a loan soon. What can I expect?
India is gradually moving towards being a marketplace where the interest rate you pay on your loan is proportional to your credit score. This year, Bank of Baroda became the fi rst Indian bank to link credit scores to loan interest rates. If you have a score of 760 or above, you can access BoB’s loans at their lowest rates. Essentially, customers maintaining healthy credit habits are rewarded, while those with lower credit scorers need to pay higher interest rates.
4) When can I see my credit score?
You don’t actually need to apply for a loan or credit card before you can see your credit score. In 2016, the Reserve Bank of India mandated all CICs to offer individuals one free credit report per year. The RBI said this free report needs to be as detailed as the reports that CICs issue upon requests from lending institutions.
5) Where can I get my credit score?
You can log on to the websites of the CICs to access your free or paid report reports. You also have the option to access these reports, paperlessly, instantly, and at no cost to you, on third-party websites. For example, BankBazaar.com offers you a free Experian credit report in three minutes, paperlessly and free. Unlike ‘hard’ credit queries (that lending institutions make on your behalf when you apply for a loan), this self-query is treated as a ‘soft’ one, which does not negatively impact your credit score. Typically, any person with a history of credit card or loan is assigned a three-digit credit score. However, some people may not have a credit score. As per CIBIL, anyone who doesn’t have a credit history (either completely or for two years), or has used only add-on credit cards, will be treated as a person with no credit record and therefore can’t be assigned a credit score.
6) I checked my score. Why is it so low?
Four factors broadly impact your credit score. One – you have not repaid your credit card bills or loan EMIs in a timely manner, and may have defaulted on them. Two — you frequently hit your credit card limit, thus making high utilisation of your available credit limit. Three — you have more unsecured loans (credit cards and personal loans) than secured loans (home loans and auto loans). Four — you have made several new loan applications recently, which makes you appear credit-hungry, thus lowering your credit score.
7) Should I be worried about my credit card usage?
If you use a credit card, you should aim to settle your monthly bills in full and on time. Delays, part-payments and defaults would reflect on your credit report and harm your credit score. Secondly, you should avoid hitting the spending limit on your credit card frequently. As a thumb rule, you should spend no more than 20-30% of your available credit limit across all your credit cards. If you are spending above this limit on one card, you may split the expenditure between multiple credit cards to reduce your overall credit-use ratio. If you frequently hit the 100% limit on one or all your cards, this would show you as being perennially hungry for short-term credit. This would not bode well for your credit score — or for your chances of being sanctioned another credit card or loan.
8) I see errors in my report. What can I do?
To compile your credit history, credit bureaus rely on data shared by lending institutions you took a credit card or loan from. Sometimes, there could be errors in the data they report. It may be even possible that you’ve been accidentally assigned someone else’s credit data. This can adversely impact your credit score. CICs have dispute resolution mechanisms through which errors can be reported and corrected. Visit their websites for details.
9) What can I do to increase my score?
Not only must you have a history of timely repayments, but also have a healthy mix of secured and unsecured loan repayments. While timely repayments of personal loans and credit cards will be rewarded, what makes a higher impact on your credit score is the timely repayment of long-term and secured loans such as home and auto loans.
10) CICs haven’t fixed my credit report errors. What can I do?
CICs rely on data given by lending institutions to compile your credit score. It may be that the lending institution has delayed updating your credit data, or may be that it disputes your version of events. You need to contact your lender immediately to initiate the process for the correct reporting of your data.
The author is CEO, BankBazaar.com