Don't forget to think about money and credit scores because the latter determines your access to loans, credit cards, apartments and even jobs!
You probably already know that you can damage your credit by
not paying bills on time. You probably also know that when you apply for a line
of credit, the lender asks for copy of your Income Tax returns for the last
three years, your salary details, bank account summary and stuff. “Any loans
pending, Sir?” is a definite one followed by “Do you use credit cards?” Most of
us do, but did you know about a credit score? Do you have any idea what the
bank executive does with your reports and the PAN card details? No? Here’s what
I learnt when we went refrigerator shopping. The four-door monstrosity cost a
lakh, but thanks to Bajaj Finserv for a hassle-free personal loan, we managed.
But not before we spent some anxious moments regarding my “credit score”. While
my score didn't qualify me for getting the refrigerator, thankfully my wife’s
did. Though we got the fridge home and I was too happy to put my bubblies for
the evening party at home, I couldn’t put the rejection thought out of my mind.
I had to tell it to the world, especially those who’re footloose and fancy-free
like me.
Wracked with guilt, I was determined to get my score back to
"excellent." I know I’ll do it, but that’s another story for another
day. Right now, it’s important to tell all that credit scores are like report
cards for grown-ups. It’s a three-digit “grade” you get on a scale that ranges
from 300 to 900 and it’s being done by Cibil - India’s first Credit Information
Company, also commonly referred as a Credit Bureau. Your score indicates your
creditworthiness to potential lenders, banks, landlords, insurance companies,
and even to some employers, for instance. We are sure you know that the higher
your score the better. If it wasn’t important, people like Philip X. Tirone
won’t be basking in the glory of bestsellers like “7 Steps to a 720 Credit
Score” with the all-important catchline: I Bet You Didn’t Know This About
Credit - 38 Important Facts You Should Know About Credit! “You probably didn’t
know that increasing your credit score might make you more employable,” writes
Tirone. “Some companies consider your credit score to be more than your
financial reputation. In fact, employers consider it to be a sign of your
character. Some companies (especially those hiring employees responsible for
money) won’t hire a person with poor credit.” A good credit score is important
because as much as 79% of the loans approved are for individuals with a score
greater than 750! So your Credit Score and Credit Information Report (CIR) is full
evidence of your credit worthiness. All lenders check your Credit Score before
approving your loan application. You can do, too. Your credit score tells the
lender how likely you are to pay back loan or credit card dues based on your
past repayment behavior. The higher your score, the more the chance of your
loan application getting approved!
What is Cibil?
Credit Information Bureau (India) Ltd or CIBIL is India’s
first Credit Information Company. It collects and maintains records of
individuals and non-individuals’ (commercial entities) payments pertaining to
loans and credit cards. These records are submitted to Cibil by banks and other
lenders on a monthly basis; using this information a Credit Information Report
(CIR) and Credit Score is developed, enabling lenders to evaluate and approve
loan applications. A Credit Bureau is licensed by the RBI and governed by the
Credit Information Companies (Regulation) Act of 2005.
Why is my credit
score important for getting my loan approved?
The CIBIL TransUnion Score plays a critical role in the loan
application process. After an applicant fills out the application form and
hands it over to the lender, the lender first checks the credit score and
credit report of the applicant. If the credit score is low, the lender may not
even consider the application further and reject it at that point. If the
credit score is high, the lender will look into the application and consider
other details to determine if the applicant is credit-worthy. The credit score
works as a first impression for the lender, the higher the score, the better
are your chances of the loan being reviewed and approved. The decision to lend
is solely dependent on the lender and CIBIL does not in any manner decide if
the loan/credit card should be sanctioned or not.
How can I improve my Credit Score?
You can improve your Credit Score by maintaining a good
credit history. This will be viewed favorably by lenders and it can be done
with six simple rules:
Always pay your dues on time: Late payments are viewed negatively
by lenders.
Keep your balances low: Always prudent to
not use too much credit, control your utilization.
Maintain a healthy
mix of credit: It is better to have
a healthy mix of secured (such as home loan, auto loan) and unsecured loans (such
as personal loan, credit cards). Too many unsecured loans may be viewed
negatively.
Apply for new credit
in moderation: You don’t want to seem credit hungry; apply for new credit
cautiously.
Monitor your
co-signed, guaranteed and joint accounts monthly: In co-signed, guaranteed
or jointly held accounts, you are held equally liable for missed payments. Your
joint holder’s (or the guaranteed individual) negligence could affect your
ability to access credit when you need it.
Review you credit history frequently throughout the year: Purchase your CIR from time to time to avoid
unpleasant surprises in the form of a rejected loan application.
What major factors affect my credit
score?
There are four major factors that affect your score.
1. Payment history: Making late payments
or defaulting your EMIs or dues (recently or consistently) shows you are having
trouble to pay your existing credit obligations and will negatively affect your
score.
2. High utilization of Credit Limit: While increased spending on your credit card
will not necessarily affect your score in a negative manner, an increase in the
current balance of your credit card indicates an increased repayment burden and
may negatively affect your score.
3. Higher percentage of credit cards or
personal loans (also known as unsecured loan): Having a balanced mix
between the secured loans (such as Auto, Home loan) and unsecured loan (such as
Personal loan, Credit Card) is likely to have a more positive affect on your
score.
4. Many new accounts opened recently: If
you have recently been sanctioned multiple loans and credit cards, then lenders
will view your application with caution because this behaviour indicates your
debt burden has increased, which will negatively impact your score.
If your credit score is already below average as a result of
poor decisions and irresponsible financial actions in your past, it's important
to immediately begin rectifying the situation by taking steps to begin
rebuilding your credit. This process can take months or even years of diligence
and responsible financial planning.
Credit report errors
There are all sorts of errors that can sneak onto your
credit reports — an account that’s not even yours, a “late payment” that was
actually made on time, a paid debt that’s still listed as in collections. So remember
to keep checking your credit reports as errors can land on your report when
lenders, banks or credit bureaus get it wrong. Nevertheless, it’s your
responsibility to get them fixed because as they say it’s your problem and credit
reporting agencies don’t have an obligation to correct anything on a credit
report unless you tell them it’s wrong. The only way to know about mistakes on
your credit reports is to check them regularly. As soon as you have your
reports, scan thoroughly for errors. A slightly misspelled address or variation
of your name is minor; get it fixed but don’t fret too much. More serious
mistakes include accounts that don’t belong to you, collections that aren’t
yours, late payments that weren’t late and loan inquiries you didn’t authorize.
If you’ve found something you believe to be truly inaccurate (rather than
regrettable), file a dispute.
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