What is Credit Score?
When you are applying for a loan from a bank, how the bank will decide whether you are a trust worthy client and how you will repay the loan? The bank will verify your income record and assess your capacity to repay. Is there a better option for the bank to establish your creditworthiness? Yes, it is through your credit score.
There are credit information bureaus whose business is to collect the details of repayment history of individuals and tabulate it and assign a credit score to the individual based on many vital parameters. These bureaus will collect this information from all lenders in the country. If you have taken a personal loan and were not regular in paying the EMIs, it will be reflected in your credit score. If you are a prompt client, it will help you in getting a high score.
There are many credit information bureaus in India. The leading ones are Credit Information Bureau (India) Limited (CIBIL), Experian, Highmark and Equifax.
The most common credit score in India is the CIBIL score. It is a 3 digit number between 300 -900 assigned to each individual based on his credit history in the past. If your score is nearer to 900, you will be treated as a creditworthy client by lenders like banks. But if your credit score is low, then chance of getting further loan is remote.
Which factors will affect your credit score?
If you are having a low credit score, it can affect your ability to get further loans. You must always maintain a good credit score. First you must know the factors which decide your credit score. They are:
1. Default of EMIs/ Credit Card payments: If you have not paid your EMIs in time, it will affect your credit score very badly. If you skip the credit card bill, it can also damage your credit score. If you want to have a good credit score, ensure that you are paying all your dues in time. There is a proposal to include the phone bills etc under the purview of this information. The basic rule is – pay all bills in time.
2. Usage of Credit Cards: If you are using large number of credit cards, the lenders will see you as credit hungry. If your credit card limit is 1 lakh and if you are using upto 90,000 every month, you are again branded as credit hungry. It is better to use the credit card within 50% of the credit limit. If you are paying only the minimum amount due every month and is availing roll over facility, your credit score will be damaged. But if you use your credit card carefully and pay the full amount due in time it can improve your credit score.
3. Applying for all credit opportunities/credit cards: If you have a habit of applying for many credit cards or enquire for loan, it will affect your credit score. Your enquiries will be reported to CIBIL and it will damage your credit score, even if you have not availed the loan. If you are having many unsecured loans like personal loans, it can also affect the credit score. If you are a guarantor for the loan of others and if they default on the repayment, your credit score also will be affected.
4. Settlement with lenders: If you have not repaid your loan, the lenders will allow you to settle the dues with some offers like reduction in interest. But such transactions will be reported to CIBIL and will damage your credit score. If you default the EMIs and if the bank is unable to recover the amount from you even after their best efforts, the bank will write off the amount. But it will be reported to CIBIL and your credit score will be affected very badly.
How to improve your credit score?
All the factors mentioned above have different weightage in deciding your credit score. The only option is to start repaying your loan in time. If it is not possible, discuss with your lender and get a revised schedule for repayment. But if your credit score is damaged, it will take around 3-4 years to improve the score.
Melvin Joseph
SEBI registered Investment Adviser
SEBI registration number -INA 000000342
Finvin Financial Planners
10. Ground Floor, Olive Excel CHS Ltd
Plot No- 16, Sector 42, Nerul, Navi Mumbai – 400 706
Mobile: 91 9820843739
Website : http://www.finvin.in
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