In a time when virtually everyone is applying for a loan for one purpose or another, maintain a healthy credit score is becoming increasingly important. Credit score is a three-digit number which reflects one’s creditworthiness. Calculated by credit bureaus, one’s credit score is based on the data made available to them by lending institutions every month. The score reflects one’s track record in handling credit.
A good credit score ensures that any loan you apply for gets sanctioned quickly and that the best possible interest rate in the market is available to you. At a time when almost every single household is applying for some sort of loan; a high credit score can translate into lakhs of rupees being saved in interest charges.
Prior to applying for any loan, you must apply to one of India’s four credit bureaus-CIBIL, Equifax, Experian or Crif Highmark to find out your credit score and gain a credit report. On an average, credit scores range from 300 to 900.A majority of the loans are offered to people whose credit score is higher than 750. In case your credit score is lower, it is best to try and improve it before applying for a loan.
Improving your score
- Review your report:In case you are planning to apply for a loan in the near future, reviewing your credit report at regular intervals is a good idea. As per expert advice, credit reports should be reviewed as frequently as once a month or at least once a quarter.
- Resolve past mistakes:Defaulting on loans can occur due to a variety of reasons. Remedial actions are include creating a budget and sticking to it diligently or informing the bank about any monetary difficulties and asking for a revised payment date, thereby reducing the EMI and extending the loan tenure.
- Create a credit history:If any loan product hasn’t been used in the past, your credit score will be poor. Hence, loan products should be put to use right from the time you start earning. Making use of them in a responsible manner will help in building up a sound credit history and will come in handy when applying for a big loan such as a home loan.
- Develop a good mix of credit:A healthy mix of credit aids in assembling a good credit score. This can include creating a mix of unsecured and secured loans, instead of depending massively on one category.
- Make use of credit prudently:As long as the sum of your EMIs does not exceed 50% of your take home salary, most banks are open to giving you a loan. If interest rates rise, your EMIs will increase. Hence,one must stick to a prudent limit of restricting all EMI and credit card payments to 30% of your take home salary.
- Don’t display credit hunger:If you make use of credit cards, it’s best to curtail its usage up to 40% of the credit limit allowed on the card. Applying for bank loans should also be avoided within a limited time period, because every time you do so, your credit health undergoes a check-up by institutions and every such enquiry results in lowered credit score.
- Get errors rectified:Low credit scores can, at times, be a result of errors in the records of lending institutions. Thus, it is highly important that the report gets checked for discrepancies and they get rectified at the earliest.
- Don’t pay for other’s sins:Avoid being a victim of other people’s financial indiscretions. Other than if the person is really close to you, like your spouse, do not become a co-borrower in a loan. Likewise, do not become a guarantor. This is so that you aren’t liable to make payments in case the borrower defaults. If you fail to pay the money, your credit score could take a hit.
Mr Amar Pandit, CFA and founder of Happyness Factory