There used to be a time when the only place you encountered the words ‘credit report’ or ‘credit score’ was while flipping through business news channels. Most people didn’t even know what these words meant, till they marched into a bank to ask for a credit card or a loan, only to be denied because their credit score wasn’t good enough. But since then, a growing number of Indians, especially women, are seeing merit in learning about their credit score and ensuring that it is in ship shape for when they are ready to seek a line of credit.
The Reserve Bank of India has licensed four credit information companies in India to calculate credit scores. These are the Credit Information Bureau (India) Limited (CIBIL), Experian, CRIF Highmark and Equifax. Each of these companies allow individuals to access their credit scores for free.
It is no surprise, then, that an increasing number of individuals are self-monitoring their credit scores, empowering them to improve their credit profiles. According to the annual retail credit insights on women published by TransUnion CIBIL last month, in CY 2022, more than 8.2 million women accessed their credit score and report, compared to 5.7 million in CY 2021, demonstrating a growth of 44 per cent. “The increase in the number of women monitoring their Credit Score and report reflects improved financial awareness and credit consciousness. It also demonstrates that women are cognisant that credit discipline matters, and are taking proactive measures to continually improve their credit profile,” says Sujata Ahlawat, senior vice-president and head, DTC Interactive, TransUnion CIBIL. With many credit institutions offering better terms and conditions and lower rates of interest for borrowers with a higher credit score, it was beneficial for consumers to monitor and maintain a healthy credit profile.
What is a credit score?
Simply put, your credit score is a three-digit numeric summary of your credit history. The number ranges from 300-900 and rates a consumer’s credit-worthiness, with 900 being the highest score. It gives lenders, such as banks, a fair idea of how reliable you might be if you want to borrow money. It also gives them a deep insight into your ability and willingness to pay off loans in a timely manner and, more importantly, your aptitude to handle money itself. The credit score is a reliable benchmark for lenders because the value is determined taking your credit history into account. It would take into consideration several factors such as the number of open accounts, the number of loans or level of debt accumulated, credit card payments, defaults, repayment history, and so forth.
Your credit score is a three-digit numeric summary of your credit history
What is a credit score?
Simply put, your credit score is a three-digit numeric summary of your credit history. The number ranges from 300-900 and rates a consumer’s credit-worthiness, with 900 being the highest score. It gives lenders, such as banks, a fair idea of how reliable you might be if you want to borrow money. It also gives them a deep insight into your ability and willingness to pay off loans in a timely manner and, more importantly, your aptitude to handle money itself. The credit score is a reliable benchmark for lenders because the value is determined taking your credit history into account. It would take into consideration several factors such as the number of open accounts, the number of loans or level of debt accumulated, credit card payments, defaults, repayment history, and so forth.
In short, your credit score takes into account every major financial step and your overall behaviour in handling money, along with your general attitude towards financial obligations. According to data analytics and consumer credit reporting company Experian, while different organisations provide a different set of credit scores, they are all calculated using a similar set of inputs. The desirable average credit score is about 750; anything below which is considered adverse. Lenders or other users may find an applicant with a credit score of less than 750 as unworthy, and hence may reject such requests. However, higher the score, the better a borrower looks to potential lenders.
Having a good credit score can open up a world of opportunities for you. Not only would it help you rake in a line of credit, it would also land you other benefits such as a higher loan amount, a lower interest rate, and choice of tenure to repay the loan. A good credit score gives the lender confidence that you have the ability, the willingness and the discipline to repay your loans. It may come handy while landing a new credit card, but makes a big difference when you seek larger loans while purchasing a home or a car.
There is a definite advantage to this, according to Experian. Besides eligibility and faster approval of credit, a good score can help you get a lower rate of interest on your loan, which is markedly lower than the rate applicable otherwise. It may help you save thousands of rupees over the loan period, as a small percentage reduction in interest can make a major difference. Another benefit will be a higher loan amount. Moreover, loans come saddled with processing fees and other charges. With a good credit score, you can bargain your way out of some of these. Here’s what to keep in mind in order to improve–and maintain–your credit score.
When you seek a loan or credit, your credit risk is evaluated largely by screening your credit score maintained by an agency. The credit score guides lenders to decide whether to approve your credit request or not. This is why it is important to check your credit report regularly and take corrective steps against misreporting, theft of identity, and even accounts you do not recognise, as these factors can unfairly cast you in a bad light.
Self-monitoring your credit score can have its advantages, as it gives you a chance to work towards a better score. According to the report titled ‘CIBIL for every Indian’, 47 per cent of self-monitoring consumers improved their Credit Score in the period between October 2021 and September 2022—in six months of monitoring their scores—as opposed to non-monitoring consumers.
It goes without saying that a good credit score is built on the back of good financial discipline. Every significant financial move or misstep is reported to the bureaus and can impact your score, so it makes good sense to be disciplined about your finances. This means consistently paying your credit card bills and loans on time. It is ideal to make full payments on credit card payments, as it demonstrates that you have a good handle on your finances.
On the other hand, paying only the minimum amount on your credit card bill, even if you pay on time, can prove to be a deterrent for lenders. Never ignore unpaid, or overdue payments; these can pull your score down and have a negative impact. It would be prudent to make the payment at the earliest and get back on track. According to Experian, if you are planning to take a larger loan, such as a home loan, then you must utilise the existing credit means judiciously. For instance, use only 30 per cent of the credit card limit besides keeping multiple cards to have a higher limit. Always pay bills in full, and avoid applying for too many loans or making multiple enquiries with multiple lenders for the same loan.
More often than not, individuals end up with poor credit history due lack of discipline or sheer ignorance. There are few common mistakes which can be avoided, according to Experian.
*While most of us believe that living debt-free is ideal, this isn’t necessarily true when you are seeking a line of credit for big purchases such as a home loan. Lack of credit history could lead to denial of credit as lenders do not have any evidence of a reliable payment history or previous responsible behaviour.
*When it comes to credit card bill payments, missing a deadline isn’t the only thing that can impact your score. It is better to pay the dues in full as far as possible. Paying the minimum amount, even if you do it consistently, is considered undesirable.
* When in need, individuals tend to apply to several lenders at the same time. This, in turn, will trigger enquiries from the multiple lenders about the said individual. It can reflect poorly on a credit report as it may create the wrong impression that an individual is seeking to borrow beyond their abilities. The ideal way to go about it is to start with one lender and wait for a response.
*More often than not, we tend to use much of the credit that is extended to us, especially on credit cards, without realising the impact it can have on our credit score. A good credit utilisation ratio (the actual usage versus accessible credit) is key to a good score. It is ideal to keep the debt on each card around 30 per cent and the overall credit to 10 per cent.
*Avoid closing old credit card accounts, even if you’re not using them anymore. If you have an old card with a good repayment history, it can actually boost your credit history and, subsequently, also boost your credit score.