16-Nov-2015 written by : FSI-Team
These days there are a lot of awareness campaigns going, on the impact and importance of maintaining a high credit score. There is a burst of write ups everywhere in the media that are warning prospective borrowers to maintain satisfactory credit scores or urging them to improve credit score lest the lose out on a chance to borrow credit when they are in requirement of it, at competitive rates of interest.
Some articles even say how your loan application may not be processed if your credit score is low and how you must increase credit score to be even eligible to apply for a loan. While some say that each of the above mentioned statements are true, some financial activists claim in their blogs and websites that the credit score, at least in a country like ours, is nothing but a whip cracked on innocent borrowers by lenders. Today, we try and take a closer look at reality.
At the outset, let us say that this is not an attempt to undermine the importance of a good credit score. In today’s day and age, when RBI, the central banking authority of India has made it mandatory for all lenders to consider the CIBIL score (CIBIL score is the most accessed credit score in India, given the fact it is the premiere credit institution of the nation and has the beginner’s advantage) while assessing the credit worthiness of the customer, the credit score you hold is of paramount importance.
This is because your CIBIL score acts as a ready reckoner for a prospective lender which tries to assess your risk profile in every way possible before it approves your loan application. You CIBIL score being an accurate measure of your financial health, gives an excellent reference point for the bank of financial institution in question. The closer your CIBIL score is to 900, the more the credit institution gains confidence in the borrower and his ability to repay the loan within the stipulated time frame.
As a result, not only are there better chances of your loan application getting approved in a shorter time frame, as the due diligence required is cut down drastically, you may even get up getting better incentives such as a processing fee being waived or even a slightly better rate of interest or better terms of servicing your loan. The moot point is, that the ball remains firmly in your court if you are able to maintain a high credit score. With banks becoming more stringent about their lending process, in the wake of rising non- performing assets (NPA) maintaining a good credit score or making an effort to increase credit score, certainly has its advantages.
But does this mean that a person with a moderate or low credit score will not be able to access credit? Well, that may be true if your credit score has been consistently low over a long period of time. However if you have been consistently repaying your dues and your credit score has been improving as a result, there is a chance that the lender will look into the matter, and take a look at your credit score from 12 months earlier and compare it with your recent scores and make a credit disbursal decision after it is satisfied about the improvement in your score.
The good news therefore, is that your credit score is not something that is etched in stone. Even if your credit score has dipped some time in that past, you can cut a few corners to repay your dues and that will improve your credit score fact. It is also important to bear in mind, that the CIBIL score and the CIBIL report is not the only credit assessment tool that a bank uses. It also looks at other credentials of a prospective customer such as his age, income profile, banking accounts and other relevant details that it may ask you to furnish.
However, one common mistake that most people make is that they become so wary of their credit score dipping that they end up making financial blunders. For instance some people may be maintaining high credit score, but do not have adequate cash flows to maintain monthly expenses. This approach to credit score is a wrong one.
As a consumer, you should always learn to prioritize with the money that you are working so hard to earn. Begin with inculcating good habits that spending money in accordance with a financial plan, use your credit card judiciously and pay your outstanding amounts in full before the end of each billing cycle and do not default on the monthly repayments of the loans you have availed of.
If you can consistently maintain good financial habits, you are bound to end up with a good credit score. So do not be wary of your credit score, and make it work to your advantage. Your primary focus should be on taking care of your financial health. A good credit score will merely be a by-product!