Your credit history has much to do with your creditworthiness. Being financially disciplined not only improves your credit score and your credit history, it also enables you to bargain a better loan deal
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.
‘Secured loans weigh higher on credit score’
When a borrower’s credit history has more secured loans, the borrower’s credit score is likely to be higher, says Harshala Chandorkar, Senior Vice President (Consumer Relations) CIBIL
What is a good credit score and why it is important?
An individual’s CIBIL report and CIBIL TransUnion Score, other than his/her income, is the single most important tool used by lenders to evaluate application for any loan. Your CIBIL report and score not only determines whether or not you qualify for a loan, but it may also have an impact on the terms and conditions you can avail on the loan. In addition to a good credit score lenders may also consider other critical factors like your income to debt ratio, your residential status, professional qualifications etc. while deciding on your loan application. Therefore along with a good credit score you must also ensure that all these factors are well placed before applying for the loan.
What are the factors that negatively impact one’s credit score and how to improve one’s credit history?
The following factors may hamper your credit score:
Non-payment of dues: Make regular and timely re-payments of your loan to maintain your credit level.
Credit hungry behaviour: Do not apply for too many loans or credit cards as this would mean more number of enquiries added on your credit report, which negatively impacts your credit score.
Credit exposure: Availing multiple loans and credit cards in short period of time also hampers your credit score as this means higher credit exposure and therefore greater risk of default.
Frequency of opening and closing a loan account: Once you have availed a loan, it is advisable to keep it for at least 12 months before closing it. The velocity of opening and closing a loan account impacts your credit score.
High utilization: The other factor that may negatively impact your credit score is when your balances on credit cards are very close to the ‘High Credit’ reflected on your credit report. For example, if you have used Rs 90,000 out of a credit limit of Rs 1,00,000 this may negatively impact your credit score.
Type of loans: The type of credit availed by a borrower has an impact on his credit score. Secured loans like home loans, auto loans etc., weigh higher on a person’s credit score than unsecured loans like personal loans, credit cards etc. This means that when a borrower’s credit history has more secured loans, the borrower’s credit score is likely to be higher, subject to timely and regular repayments of the loan EMIs by the borrower.
‘Credit score can be rebuilt over time’
Rebuilding credit means paying on time and the longer a credit history is without negative information, the better, says Mohan Jayaraman, MD, Experian Credit Information Company of India and Country Manager, Experian India
What are the major myths or common misconceptions regarding credit history?
Following are some of the common myths (misconceptions) regarding credit information company/credit bureau (CIC) and credit history.
#Myth 1: CIC decides who gets credit
Fact: CICs do not make judgments about the information in credit information report (CIR). CICs simply compile information that is provided directly and voluntarily by member lenders. Lenders use that information to help them assess the risk of lending to an individual.
Myth 2: CIC denied you credit
Fact: CICs don’t make decisions; that's up to lenders, who check the information in your CIR along with other information such as items from your loan application.
Myth 3: CIC holds a credit blacklist
Fact: CICs do not hold any credit blacklist. Some factors that lenders do consider include your repayment history and how much you already owe.
Myth 4: Once a credit score is bad, it can never be rebuilt.
Fact: Credit can be rebuilt over time. Your CIR indicates which credit accounts are closed or inactive, but the history remains nonetheless. Late or missed payments stay on your CIR as payment history. Rebuilding credit means paying on time and the longer a credit history is without negative information, such as late payments, the better.
Myth 5: Checking your own individual CIR affects your rating.
Fact: If you access your own CIR, it does not have any effect on your credit score since it is a non-credit enquiry.
Does using credit cards negatively impact one's credit history?
Credit cards are gaining popularity amongst everyone, particularly with the working middle class. Your bank assesses your overall spending limit and issues cards accordingly. It is important to understand that increased credit limit usage or additional lines of credit could have an impact on your credit profile if not handled in a correct manner.
Your credit profile that is build up in a CIC is a composite of your credit behaviour with all your banks and lenders over a period of time. If a card holder defaults on any payments, this will be reflected as a default on the CIR. If a stretched credit usage results in over leverage and consequently a delay in repayment this will have an impact on your credit profile and your credit score. The prudent path would be to ensure that you make use of credit limits wisely and typically spend on your card what you can repay to your bank on the repayment due date.
Written By: Sunil Kumar Singh