14-Mar-2016 written by : FSI-Team
When it comes to credit scores, it has become increasingly important not only to build a good score but also maintain it and enhance it over time. This is because not just globally but closer home, even in India credit scores are fast gaining significance in one’s financial life.
A credit score is a three-digit numeric representation of an individual’s creditworthiness, typically ranging between 300 and 900. It is used by lenders to determine how likely a loan is to go bad, or the probability of a person defaulting on a loan. A higher score normally means that the chances of your loan or credit card application getting approved are also correspondingly higher. It also determines the terms and conditions at which you are offered a loan, especially with regards to the interest rate.
A CIBIL score does not differ from a credit score. With CIBIL being the oldest of India’s four credit bureaus – the others being Equifax, Experian and CRIF High Mark – very often a credit score is known as a CIBIL score colloquially.
When you apply for a fresh line of credit, the first thing a lender does is to pull a copy of your CIBIL report, of which the score is an integral part. This score can be the difference between your loan being approved or rejected. And if not rejected, a low score can mean credit approval at less than ideal terms and conditions.
Hence, it becomes crucial to maintain a good CIBIL score.
So what do people with good scores have in common? What is it they do? Is there some secret mantra to it? Read on to know more!
The first thing to do is to call for a copy of your credit report, and go through it with a fine- tooth comb. This will help you identify lacunae, if any, in the report. If you believe your report does contain some incorrect or inaccurate information, do bring it to the notice of the concerned credit bureau by raising a ‘dispute’. If the data indeed requires rectification, it will be done upon receipt of updated information from the concerned lender.
However, your basic requirement to attain a good score is to practice some good financial habits on an ongoing basis, and not merely as a one-off exercise.
No missed payments – Among all the information contained in your credit report, the repayment behavior you exhibit is of paramount importance. This tells a lender just how responsibly you can handle credit, whether old, existing or any new credit you apply for. Here is where making timely payments comes in – a clean record includes making payments on all outstanding dues (whether a loan or credit card) on time, on or before the due date.
While some individuals do indeed miss payment deadlines intentionally with the intention to default, others tend to do so merely because they find it difficult to keep track of payment dates. If you fall into this latter category, then consider setting up payment reminders on your mobile device, or signing up for auto debit options that take away the requirement of having to make payments physically.
Retain old accounts – Let us say you have a credit card account for the past 15 years, one which you have serviced well, i.e. by making timely payments. In such cases, it is prudent to leave this account open or live on your credit report, as nothing conveys your creditworthiness as a card that is long-standing and with a perfect (or near-perfect) repayment record. Hence, retain ‘good’ old debt, and see your score look good.
Track your credit utilization limit – When you avail of a credit card it comes with a pre- determined credit limit that tells you how much you can spend on the card. However, remember that the sky may not (always) be the limit! Be prudent in your spends, and ideally do not exceed 30 percent of the credit utilization limit set out for you. If you use a number of cards, then the spends across all cards should not cross the same number. This indicates to a lender that you are able to use credit responsibly and not as a way to make ends meet on a regular basis.
Keep the balances low – While a card does allow you the convenience of rolling over the outstanding amount to the next month; do try to keep that option absolutely as a last resort. While it does not immediately impact your score, what it does do is possibly nudge you into a debt trap that can only go downwards. This over the long term can cause you to rack up balances and ultimately affect your solvency. If not checked, you are likely to skip or miss payments because of these issues, which then ultimately affect your score negatively.
Do not apply for unnecessary fresh credit – Never say never, but do not apply for credit cards and loans unless you really do require them. This is because each time a lender makes an enquiry against your credit report; your account takes a ‘hit’, which brings down your score temporarily, especially if your credit history is relatively short or the number of accounts you have is low. This hit can go against your score.
When you do apply though, make sure that you have a healthy mix of both secured and unsecured credit, to maintain a good credit mix.
If you want to enhance credit score, it is never too late to begin. What if your score is low and you need help to work on it? A credit health management company would be your go-to, to help you find a solution to your credit woes.
Remember, keeping fit financially is very important and the first step is to have a high CIBIL score.