An individual’s credit score plays an important role in determining his/her credit worthiness. A lender, such as a bank or a non-banking finance company, will evaluate the credit score of a potential borrower to determine whether or not to lend to the individual. The credit score also impacts the amount of loan sanctioned and also the interest rate payable on the loan by the borrower. What is more, if a borrower has a low credit score, the lender may reject the loan application.
What is a credit score?
A credit score is a three-digit number that represents the creditworthiness of an individual. It typically ranges between 300 and 900, 900 being the highest score possible. Banks and various regulated lending institutions check your credit score when you apply for a loan. This score is prepared by TransUnion CIBIL, one of the four credit bureaus functioning in India (others bureaus include Experian, CRIF High Mark and Equifax).
What is a good credit score?
According to credit information company, TranUnion CIBIL’s website, the closer your score is to 900, the higher are the chances of your loan application getting approved. Generally, a credit score of 750 and above is considered to be a good score.
Therefore, it is important to be aware of factors that affect your credit score such as timely and full payment of equated monthly instalments (EMIs) and credit card dues. If you have a weak score, it may largely be because of late or missed payments and high credit utilisation. (Credit utilisation ratio refers to the proportion of total credit card limit used by a credit cardholder.)
Adhil Shetty, CEO, Bankbazaar.com said that 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 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,” Shetty said.
Here are five ways to improve your credit score.
1. Pay EMIs and credit card dues on time
Among all the parameters factored in by the credit bureaus (such as CIBIL), while calculating the credit score, regular and timely repayment of credit card dues and loan EMIs is widely believed to receive the maximum weightage. Hence, timely repayment of loans and credit card dues is the first step towards steadily building or maintaining one’s credit score
2. Keep the credit utilisation ratio (CUR) within 30 per cent
Radhika Binani, Chief Product Officer, Paisabazaar.com says that lenders consider CURs above 30 per cent as a sign of credit hungry behaviour and credit bureaus also reduce an individual’s credit score by some points on his/her CUR breaching this mark. This makes it crucial to contain the CUR within 30 per cent to avoid a reduction in your credit score. If one’s CUR frequently breaches this mark, one should either request one’s card issuer to raise one’s credit limit or opt for another credit card. “A higher credit limit will increase a person’s credit score provided the person does not end up increasing his/her credit card spends proportionately,” Binani said.
3. Avoid multiple loan or credit card applications within a short period
Whenever one submits a loan or credit card application, the lender fetches the applicant’s credit report from the credit bureau to assess his/her creditworthiness. Such lender-initiated credit report requests are termed as hard enquiries, each of which reduces the loan applicant’s credit score by a few points. Binani said, “Making multiple loans or credit card applications within a short span will reduce a person’s credit score very fast.”
Instead of submitting multiple credit enquiries directly to lenders, loan or credit card applicants should visit online financial marketplaces to select the optimal credit card or loan option after comparing various loan and credit card offers available basis his/her credit score, income and other eligibility criteria. In such a scenario, these marketplaces will also fetch credit reports while offering the credit options but such requests by the marketplaces are termed as soft enquiries by the credit bureaus. Binani says, “Applying for credit card or loan through soft enquires will not impact one’s credit score.”
4. Review credit report at regular intervals
Credit bureaus calculate the credit score primarily on the basis of information provided by lenders and credit card issuers. Any wrong information listed in the credit reports, either due to clerical errors by the lender/card issuer or any fraudulent credit transactions in the borrower’s or cardholder’s name can adversely impact the credit score. The only way to spot such wrong information is to fetch and review credit reports at periodical intervals. Hence, consumers should fetch their credit reports from the bureaus at least once a year. Alternatively, they can visit online financial marketplaces to get their free credit reports and their monthly updates.
5. Do not cancel or change old credit cards
If you have been a credit card customer with a card issuer for a while and have been paying your bills on time, the card issuer may ask you to cancel your old credit card and take a new one wherein he/she may also give you attractive offers. This is something you should avoid.
“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. Examine the reason you want to cancel your card and let your bank address your concerns. For example, you may not be comfortable with the annual charges, which the bank can address by a waiver or by moving you to a card that costs less,” explained Shetty.