A credit score is a three digit numerical representation of credit worthiness of an individual. This score is determined by providing a ranking between 300 and 900 with 300 being a poor while 900 being excellent. Based on this score it is decided whether or not the bank or other lenders are comfortable with providing a loan to that individual. So it simply means that whenever you apply for a home loan or any other type of loan, your credit score will be a determining factor for the loan application to be approved. Now that we know what a credit score is let’s check how it works and how to improve it?
In India, there are four credit information companies licensed by Reserve Bank of India. The Credit Information Bureau (India) Limited (CIBIL) has functioned as a Credit Information Company from January 2001. Subsequently, in 2010, Experian, Equifax and CRIF High Mark were given licenses by Reserve Bank of India to operate as Credit Information Companies in India.
Although all the four credit information companies have developed their individual credit scores, the most popular is CIBIL credit score. The CIBIL credit score is a three digit number that represents a summary of individuals’ credit history and credit rating. As mentioned earlier this score ranges from 300 to 900, with 900 being the best score. Individuals with no credit history will have a score of −1. If the credit history is less than six months, the score will be 0. CIBIL credit score takes time to build up and usually it takes between 18 and 36 months or more of credit usage to obtain a satisfactory credit score.
Having a score of 900 is the eye candy for any lender. This shows that you are disciplined in terms of repayment of your dues on time. No late payments or missed payments. With that said it is often difficult to achieve this score as there are more factors that work as cogwheels within this credit scoring system. Even if you are hovering on or above 750, you are still in a pretty good position. You are still eligible for whatever loan you apply for. The score takes around 18-36 months to update in and across the scoring system. Therefore it is important to make your payments of your equated monthly installments or credit card dues in a timely manner. Missing on them could result in hampering your score altogether.
Every lender has their own risk grading mechanism. Some put the grading information in the public domain. Some may mention what any grade needs to pay in terms of interest but may not reveal the credit score required to be in that grade. A government bank, for instance, has two clear grades - over 700 and under 700 for most key loan categories. Another government bank reveals that its MCLR-linked loan rates are the lowest for those with scores above 750. Broadly speaking, a credit score of 750 to 800 should put in the top grade for most lenders. So if you have a higher score, you may be eligible for the best loan offers and you will have to pay lower interest on your loan. However, these benchmarks differ from one lender to another.
How should you improve your credit score? Here are some pointers to help you get started:
Pay your dues on time: This is a no brainer. The more you miss your payments, the worse your credit score will get. So it is wise to make your payment on time. If you are using a credit card then it is advisable not to spend till the brim of your credit limit. Having a higher limit on your card and spending less is a good input towards a good credit score.
Reducing Debt: This means it is off the limits for you to use too many credit cards or take multiple loans within a very short period of time. Keep a check on your spending habits and spend only on those which are necessary. That 4k TV or that dream car of yours can wait. A good thought that perfectly finds its place here is - “The more you save today, the more will be your spending power tomorrow”.
Review your credit report often: Having a look at your score frequently is a good idea. It is recommended to check it once a month when you are planning your finances for the next month. This way you will get an idea on the areas where to improve your score.
Do not close your unused credit cards: This might seem counterintuitive however this is also a factor in deciding your credit worthiness. First of all do not opt for multiple credit cards and even if you do then do not close the unused ones. The long-term continuance of your credit card account is proof that you’ve been paying your dues. In the computation of your credit score, the age of credit lines has some impact. The longer the age, the better for your score. Therefore, cancelling an old card also cancels the boost you were getting from it.