Are you planning to take a loan to purchase a house, a car or a high-priced consumer good? If so, one of the first things you should do is to check your credit score to know the chances of a loan being sanctioned or rejected by the lender.
Credit score reflects one’s creditworthiness which depends on various factors including your past history of loan default. The score is arrived at by credit bureaus on the basis of data made available by lending institutions every month. The score reflects one’s track record in handling credit.
“On an average, credit scores range from 300 to 900. A majority of the loans are offered to people whose credit score is higher than 750. A good credit score ensures that any loan you apply for gets sanctioned quickly and that the best possible interest rate in the market is available to you. So prior to applying for any loan, you must apply to one of India’s four credit bureaus – CIBIL, Equifax, Experian or Crif Highmark – to find out your credit report,” Amar Pandit, Founder & Chief Happyness Officer at HappynessFactory.in told Moneycontrol.
The gradation is as follows:
–Above 800 – excellent
–Between 750 and 800 – good
–Between 700 and 750- fair
–Between 650 and 700- poor
But, what if your credit score is low leading to loan rejection? You need to take immediate steps to improve your score so that loan applications in future sail through. Moneycontrol spoke to Pandit and Navin Chandani , Chief Business Development Officer, BankBazaar.com to know how one can improve one credit score.
Following are Amar Pandit’s recommendations:
—Resolve past mistakes: Defaulting on loans can occur due to a variety of reasons; leading a spendthrift lifestyle, loss of job, illness. Credit scores could plummet, causing all future credit market activity to cease. Remedial actions include creating a budget and sticking to it diligently or informing the bank about any monetary difficulties and asking for a revised payment date, thereby reducing the EMI and extending the loan tenure. Playing truant once you have already defaulted on a loan is the last thing one should do.
—Develop a good mix of credit: A healthy mix of credit aids in assembling a good credit score. This can include creating a mix of unsecured and secured loans, instead of depending massively on one category.
—Make use of credit prudently: As long as the sum of your EMIs does not exceed 50% of your take home salary, most banks are open to giving you a loan. But taking debt needs to be a well thought out. If interest rates rise, you EMIs will increase, leaving you in a difficult position. Hence, one must stick to a prudent limit of restricting all EMI and credit card payments to 30% of your take home salary.
—Don’t display credit hunger: If you make use of credit cards, it’s best to curtail its usage up to 40% of the credit limit allowed on the card. Applying for bank loans should also be avoided within a limited time period. This is because, every time you do so, your credit health undergoes a check-up by institutions and every such enquiry results in lowered credit score.
—Get errors rectified: Low credit scores can, at times, be a result of errors in the records of lending institutions. A loan might have been paid off but its records might not have been updated in the lender’s books or you might have become a victim of identity fraud. Such errors come to light only when a credit report goes through. Thus, it is highly important that the report gets checked for discrepancies and they get rectified at the earliest.
—Don’t pay for other’s sins: Avoid being a victim of other people’s financial indiscretions. Other than if the person is really close to you, like your spouse, do not become a co-borrower in a loan. Likewise, do not become a guarantor. This is so that you aren’t not liable to make payments in case the borrower defaults. If you fail to pay the money, your credit score could take a hit.
Bankbazaaar’s Navin Chandani’s prescriptions for improving your credit score are as follows:
—Make repayments on time: This is the most important step to follow for a healthy credit score. Be it your credit card bills or your loan EMI, try to pay it before the due date every single time. Delay of even a single day gets recorded. While such a small delay may not have an impact, they will all add up.
—Pay your bills in full: It is best to pay your entire credit card bill every time before the due date. If you cannot pay the entire amount for whatever reasons, try to pay as much as possible and not just the minimum amount. For one, the interest on credit cards charge a very high interest on the unpaid amount, increasing your burden. Second, it also gives an impression of being credit-hungry. Stick to a 30% utility on your cards and repay the due amount promptly.
—Don’t close old accounts: Old loans and credit cards with good repayment history prove that you have been using a loan or credit card for a long time and are good at paying your EMIs on time. If you randomly close your long-running credit accounts, it may adversely affect your credit score.
—Don’t randomly apply for fresh credit: Each time you apply for a loan or credit card, the bank raises a query for your credit history. Such frequent requests give the impression of being credit-hungry and can bring down your score. Also, it is not advisable to apply with multiple banks and then choose the one that offers you a loan or credit card. If you apply with multiple banks, chances are that all of them may decline your application. This can lead to further downgrading of your credit score.
—Boost your card limit: A low credit limit on your card with high utilisation does not present a very impressive picture. On the contrary, if you increase your credit limit and use a lower amount it would bolster your credit score.