27-May-2017 written by : FSI-Team
It has been about 17 years since the first Credit Information Bureau of India, popularly known as CIBIL was established. However, even after 17 years of existence, Indian populace merely has topical understanding on how it works and what should one be doing to manage a good score on their credit report. When people are not even aware that CIBIL is not the only bureau, there are three more that extend credit scores, namely, Equifax, Experian and Crif Highmark. Expectation on understanding of objectives of the bureau, how they function and factors that impact one’s credit score seems to be farfetched.
We come across various suggestions from so called credit score pandits; unfortunately most of these are without some logic or far away from the factual reality. Following are the worst credit suggestions that one must avoid.
Do not close your account even if you have surplus funds
Ramesh Mehta walked into the branch to pre close his car loan. The bank executive told him that an early closure of loan will negatively impact his credit health. Since, Ramesh was very particular about his credibility and did not want to look out for loans with bad CIBIL score at the time of need he decided to continue with the loan rather than repay it.
This is the most amazing suggestion possibly anyone could have given. Not foreclosing the loan even when one has surplus funds available is only going to have a negative impact on the finances. Why? Because the loans always attract a higher rate of interest than what possibly could be earned by investing that amount in any instrument.
More importantly, keeping the loan alive, on a depreciating asset like a car loan does not make as much sense as to pre close it if the finances permit.
Another factor that needs to be clearly understood is that the credit bureaus predict the probability of an individual defaulting on the loan. Logically, if a person has fore closed the loan with own funds is a better bet for the underwriter than one who is still repaying loads of EMIs. Fore closure only depicts financial stability and responsible approach towards credit.
Obtaining your credit report will hurt your credit score
This is a bizarre suggestion. You need to understand that there are different types of inquiries. Hard inquiry and soft inquiry. Whenever a lender inquires on your bureau report it is called a hard inquiry but when you obtain your own credit report it gets termed as a soft inquiry. You may obtain as many credit reports as you may desire without the fear of any sort of impact (negative or positive) on your credit score.
Also, the hard inquiry will not impact your credit score negatively unless you decide to shop around and there are multiple inquiries hitting your credit report in a short span of time.
As a matter of fact, the Reserve Bank of India has mandated all four credit bureaus to extend one free credit report every year.
Do not open a new credit card account; it will hurt the credit score
While this tip has some element of truth, but it is rather unfortunate. Opening of a new credit card line can have a small impact on the score since:
The average age of your credit will drop
You will have hard inquiry on the credit report
However, over a period the same will impact positively because the overall credit utilization will drop. This is calculated by adding the total outstanding on cards divided by the total credit limit available across the cards.
It is also imperative to know that too many cards can actually hurt your credit score and the credit utilization should be restricted. Having three cards is probably the best number for most of the individuals and pegging the credit card limit usage to about 30% will help maintain a good credit score.
One should never lose sight on the good credit score since it leads to saving of lakhs of rupees through better interest rates and having securing a home loan, personal loan, car loan or any other form of credit at the time when you desire it.