Have you ever been denied a loan because of a low credit score? If you have ever applied for a loan, you would have heard the lender asking questions about your credit score. Did you know that maintaining a good credit score is essential for many financial transactions including fast loan approval?
Most people do not know what a credit score is or how it works, let alone what needs to be done to maintain a good score. If you wish to know more about these, then read ahead to know our expert advice!
What is a credit score? Why do banks and financial institutions use credit scores?
A credit score is a numerical score between 300 to 900 given to individuals based on their credit history – it is a standardized representation that depicts a person’s current liabilities and ability to repay potential credit.
Banks and financial institutions use credit scores as the standardized method to assess a person’s creditworthiness. The credit score is applicable to individuals who hold a credit card or loan account and is a universally accepted method for assessing creditworthiness.
The table below provides an analysis of credit scores and their interpretation:
|300-550||Poor||Very low score.|
Need to urgently work on improving my credit score.
Implies very low creditworthiness.
No lenders are likely to extend loans unless they charge very high-interest rates.
|550-650||Fair||The score needs to be worked upon to get a loan at better interest rates.|
A few lenders will still provide loans but at higher interest rates
|650-750||Good||The score is good but can still be improved.|
Most lenders offer loans at reasonable interest rates.
Loans are available at the best interest rates.
All lenders will extend loans to these individuals.
Who calculates credit scores, and how is it calculated?
CIBILTM, Equifax, Experian, and CRIF Highmark are RBI-licensed credit bureaus in India, of which CIBILTM(Credit Information Bureau India Ltd) is the most popular credit information company.
It calculates an individual’s credit score based on their last 3-year credit history like payment history, credit card usage, credit outstanding, loan and credit card payment history, credit type and duration, the number of credit applications, etc.
How to find my credit score?
Most banks and financial institutions provide information on your credit score for free once you share the relevant details with them. You can check your credit score for free here by providing a few details. Checking your score, known as a soft query, will not reduce your credit score.
What causes my credit score to go down?
- Irresponsible Payment Behavior:
Keep a watch on the payment due dates, if you miss the deadline for credit card payment or default on a loan EMI payment, it can impact your credit score heavily. In addition to this credit score downgrade, this might also lead to higher interest rates on loans and penalties for late payments.
- Multiple Credit Enquiries:
Every time you apply for a credit card or loan, it will trigger a hard query on the credit score from the bureau and multiple such queries will bring down your score. Multiple Inquiries of these kinds indicate that the individual’s debt burden is going up substantially. This is a red flag for the credit bureau since it indicates potential lower repayment capability.
- Managing Credit Types:
Having too many credit instruments – secured and unsecured loans in your name impacts your credit score negatively. Having more unsecured loans – personal loans, credit card loans, etc. given without collaterals means that the individual’s financial dependence on personal loans and credit cards is high and hence is a clear indicator of lower repayment capacity.
- High Credit Utilization frequently:
Reaching close to the credit limit on your credit card frequently is an indicator of higher expenses and debt burden, again an indicator of lower repayment capacity.
- Credit score Report Errors:
Errors in your CIBIL™ score Reports such as incorrect data on repayment defaults, and errors in the number of credit cards or loans reported will adversely impact your credit score.
How to improve my credit score?
You can follow the steps given below to improve your credit score.
- Set reminders for payments:
Organize your monthly payments and do not miss credit card and loan EMI payment schedules. In addition to lowering the credit score, these payment misses can work against you by increasing the interest rates for current and future loans. Reminder services from Banks like automated bill payments can help you in ensuring bill payments are on time.
- Use credit wisely:
Avoid having multiple credit instruments simultaneously – the number of loans you apply for during a period of time should not be too many. To improve your credit score, make sure that you repay a loan before taking another since taking multiple loans at the same time is an indicator of insufficient funds.
- Maintain a healthy mix of credit:
If you must take credit, maintain the right balance of secured (home loan, auto loan, etc.) and unsecured loans (personal loan, credit card outstanding, etc.) of short and long terms to improve your credit score.
- Monitor your accounts:
If you are a co-applicant, guarantor, or joint accounts holder, monitor your accounts regularly. In all these cases, you will be held equally liable for missed payments. Your joint account holder’s or the guaranteed person’s negligence can affect your credit score.
- Review your credit history frequently:
Monitor your credit score and report regularly, at least once a year to check for inconsistencies or errors that might creep in. There could be instances where the institutions you deal with have made wrong entries, added incorrect information, or delayed passing relevant information against your report. If you notice such inconsistencies, inform the concerned organization immediately and get it rectified.
Follow the expert advice given here, bring in a financial discipline, and establish a good credit history to build a good credit score gradually.
Availability of credit is desirable and often needed and essential, especially to meet our planned and unplanned needs. But the credit that you avail yourself of should be dealt with in the right manner, with discretion. Maintaining a good credit score helps in accessing credit when needed.
Always remember to follow these three habits to build up a good credit score:
Maintain credit cards for as long as it is feasible, opt for longer tenure for loans and manage credit card debt well.
These can help you to build up a good credit history and discipline over time, which translates to higher credit scores.