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How to improve your credit score?

It is no secret that most loan applications are easily cleared for individuals with a credit score over 750.

June 07, 2018 10:21 IST | India Infoline News Service
Rangan NV, a middle-aged, New Delhi-based businessman currently owns a house that he bought 15 years ago. Since then, he defaulted on a couple of credit cards. After much haggling on Rangan’s part, the bank agreed on a very low settlement amount compared to the amount he owed. Needless to say, Rangan was proud of his achievement.

Fast-forward a few months, and Rangan soon realized the gravity of his mistake. When the thought to own a second house at an exotic location on the outskirts of New Delhi hit him, Rangan approached the banks to apply for a home loan. To his dismay, the application was rejected. “I was shocked to know that the bank rejected my loan as my credit score was very low, around 600,” said Rangan. Today, he has submitted to financial discipline and is working towards improving his credit score.

For someone with financial discipline, improving their credit score is no big deal. However, it can prove to be a humungous task for those who don’t have any control over their finances. 

With the Indian economy moving towards risk-based lending, it is imperative for each and every individual to fall in line when it comes to financial discipline. Else, they might end up losing a lot. Moreover, financial discipline is not something that is impossible to achieve.

 
Knowing your credit score is the first and most important step to becoming financially disciplined. Before you learn to manage and improve your credit score, let’s take a look at the procedure to obtain the information.
 
India has three important credit bureaus – CIBIL, Experian, and Equifax – and each of them uses a different scoring pattern. CIBIL scores range from 300 to 900; Equifax from 1 to 999, while Experian scores are between 1 and 1000.
 
Any loan or credit application is first subjected to the credit score test. Credit scores below 600 have a very high probability of getting rejected. A score within 600 and 750 is subjected to further scrutiny to assess the credit risk associated with the applicant. A credit score over 750, on the other hand, has the maximum chances of approval without being subjected to much scrutiny; however, poor credit behaviour in the past might be an impediment; however, this is very rare as someone with a credit score over 750 would be financially disciplined or would have taken steps to improve his eligibility.

Check your CIBIL credit report
 
Login to www.cibil.com
 
Choose one from any of the three subscription plans. They are:
One month - Rs550
Six months - Rs800 &,
One year - Rs1,200
Fill in the application form and furnish your identity (PAN Card, Aadhaar, passport, etc.)
Make payment and then click on ‘I accept and continue’ to avail your CIBIL credit score.
Similarly, you can visit the online portals of the other credit bureaus and follow the steps to know your respective credit score.
 
Now that you have obtained your credit score, let us look at some methods to improve it.
Manage your credit cards well
Some people like to flaunt their credit cards. If their wallet has some 10 divisions, they would like to fill it with nine different cards. This is a definite no for a lender. “It simply shows that a person is credit hungry. This is not something we like to see on a person’s credit history,” said an Axis Bank official responsible for clearing credit applications. So, if you have more than two (or three) credit card accounts, close them immediately.

Make your payments on time
Having too many credit cards becomes a problem when it comes to payment. For e.g., you may not remember or get confused about the due date for all your cards. Any delay in payments would attract a surcharge, late payment fees, interest charges, and proportionate service taxes. Thus, you might end up paying a lot more than usual and banks won’t let you go without getting their money.
 
Moreover, make sure you pay not only your credit card dues on time, but also your telephone, utility, and insurance premiums. “Missed payments negatively impact credit history, something which most lenders consider to determine the risk on a prospective borrower. However, time of occurrence is important here. As an example, a default that occurred a decade ago will not have the same impact on your application as a default that occurred a year ago,” said a senior official with one of the bureaus.

Pay your dues in full
Every bill that is generated in your name tells you the minimum amount due. However, don’t let the fact that you have to pay less right now make you forget that you actually owe much more. Always pay the amount in full as the remaining amount will appear as an overdue on your CIBIL score, which could hurt your score dearly. Apart from this, banks love customers who have overdue payments and they can charge them a hefty interest on the balance amount or on the entire amount, based on the terms and conditions.

Maintain a good ‘credit mix’ 
It is advisable to have a good mix of secured (home loan, auto loan, etc.) and unsecured loans (personal loan, credit card, etc.). If your credit portfolio is skewed toward unsecured loans, lenders may view this negatively.

Do not use your entire credit
If your credit card has a limit of Rs1 lakh, it does not mean that you utilize the entire amount each month. Credit utilization is inversely related to credit scores. To maintain a healthy score, it’s important to your utilization is lower.

If your unaware of your credit score or have a bad one, it’s time you work towards improving it, not only to realize that dream car or dream home but also to live a financially sound life.

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