If you are planning to take a loan
this festive season, or even a credit card, check your credit score. Home loan
rates may have plummeted as low as 6.4 per cent this season. But those rates are not available to everyone. Only those who have a credit score of 750-plus or even 800-plus can avail of them.
Whether it is buying a house, sending your child abroad for higher education, or meeting an emergency need, you may have to take a loan
at critical points in your financial life. If your credit score is low, the bigger banks will not approve your loan application. Even if a non-banking financial company (NBFC) agrees to lend to you, it will charge a higher rate of interest.
Monitor your credit score
Develop the habit of checking your credit score once every month, or at least once every quarter, and ensure that it remains above 750 at all times. "Customers must monitor their credit profiles on a regular basis and not just when they are taking a loan,” says Sujata Ahlawat, vice president and head-DTC interactive, TransUnion CIBIL. Regular monitoring is important because improving a low score takes time.
Credit bureaus like TransUnion CIBIL allow customers to check their credit report free of cost once annually. You can also check it more frequently by paying a fee. Loan aggregators also allow customers to check their credit score for free.
Improve your credit behaviour
Obtain your credit reports from all the four credit bureaus. Go through them to understand the reasons for your low score.
The key factor that affects the credit score is failure to pay equated monthly instalments (EMIs) and credit card
bills on time. “If your credit score is low due to your poor credit behaviour in the past, you need to improve it by developing a good repayment track record,” says Radhika Binani, chief product officer, Paisabazaar.com.
Being overleveraged will also affect this score. “Your EMI-to-income ratio should not exceed 50 per cent,” says Ahlawat.
Those who max out their credit card
limits frequently are also likely to see their credit scores fall. “Limit your monthly credit card
spends to 30-40 per cent of the card limit,” says Binani.
Applying for multiple loans and credit cards
within a short span of time also impacts the credit score adversely as this is perceived by lenders as a sign that the customer is credit hungry. Do not apply for new loans or credit cards
until your credit score has improved significantly. Rejected applications also tend to damage your credit score.
Sometimes, your credit score could be low because of the poor credit behaviour of someone for whom you have stood as guarantor. In the first place, avoid giving such guarantees. And if you have done so, nudge the person into improving his behaviour.
Get errors in credit report rectified
Your credit report is based on the information provided by banks and lenders to the four credit bureaus. Sometimes, due to misreporting, there can be errors in the report, which could affect your credit score. For instance, a loan may be attributed to you that you have not taken, or a loan that you have paid off completely may not be shown as “closed” by the lender.
To get such errors rectified, raise a “dispute” on the website of the credit bureau. “The bureau will check the error. If there is a need, it will notify the lender to investigate,” says Binani. She adds that it usually takes a few weeks for the mistake to be resolved and the changes to get reflected in your credit report.
Remember that there are four credit bureaus in India and you need to track the credit reports from all of them to ensure there are no errors.
Settled accounts make borrowing difficult
When a borrower is unable to pay his dues for 90 days, it becomes a “write off” account. The borrower’s credit score takes a big hit when this happens.
Suppose that the amount due was Rs. 100. A collection agent may approach the borrower and ask him to pay Rs. 70 for a “one-time settlement”. The bank takes a haircut of Rs. 30 and marks the account as “settled”. The bank no longer has the right to go back to the customer to collect the balance Rs. 30, and the customer is also not obliged to pay more. “In the bureau records, however, this will be reflected as a settled account. It is bad from a credit score perspective, though less bad than a write-off. Due to this settled account, which will be reflected in the credit report, the borrower may find that his loan applications getting rejected by banks,” says Arun Ramamurthy, a Mumbai-based author and expert on improving borrowers’ credit scores. He suggests that if while monitoring your credit report, you come across a loan amount that is shown as “settled”, it is advisable to pay the haircut amount and get it “closed”.
Points to remember
·Your credit score is calculated based on your credit behaviour over the past 36 months
·If you have not taken any loan, or used your credit card, the credit bureaus will not have data on you and will not be able to assign a credit score
·It is best to take some form of credit, like credit card dues or consumer loans, repay them on time, and build a good score that will come in handy when you have to take a big loan
·Overleveraging on unsecured loans can also raise red flags with lenders, so use a prudent mix of unsecured and secured loans
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