Credit Scores - Understanding & Maintaining Good Scores

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  The Shri Ram School as part of a summer project.

CREDIT SCORE & its IMPORTANCE (WORTHINESS)

A credit score is a three-digit number that represents a person’s credit score or worthiness.  While taking a Home loan, Personal loan, Car/Bike loan or any kind of loan, the borrower’s score gets evaluated. Higher the score, better is the borrower’s chance of getting a loan. A low credit score may hamper a borrower’s chance of getting a loan. Therefore, it is important to keep a good credit score.

CREDIT BUREAUS

A credit bureau is a credit reporting agency or an organization that collects credit information for banks or other lenders, who by looking at the report, decide on whether to grant a loan to an individual or not. A credit bureau normally provides a report which can then be translated to credit score. There are four registered credit bureaus in India, namely CIBIL (Credit Information Bureau India Limited), CRIF High mark Equifax and Experian. They play the role of providing a credit report and credit score to lenders in the market.

Understanding CIBIL Score & Need for a good Score.

In India, one of the most credible credit bureau is CIBIL (Credit Information Bureau India Limited). A CIBIL score for an individual is calculated by evaluating the repayment history on loans taken by the individual over a long period of time. The score ranges between 300 and 900, the lowest being 300 and 900 being the highest score possible. A score of above 750 is considered excellent.

A CIBIL SCORE is the most important factor for an individual to avail a loan. A CIBIL score between 300-599 indicates that the individual does not qualify for a loan whereas a score of 600-749 is considered as good and gives the individual a chance of getting a loan and a score of 750+ means the person has a very good credit or repayment history which almost guarantees a loan to an individual.

All other bureaus (Equifax, Experian & CRIF High mark) also operate in a similar fashion.

 

 

FACTORS AFFECTING CIBIL SCORE

1) PAYMENT HISTORY - Repayment history on past loan is a major contributor to your credit score. Paying your credit card bills and EMI’s( Equated Monthly instalments ) affects your credit score the most. Issues, like delayed payment, missed EMI payment, bankruptcy or other payment issues can impact your credit score in a negative way. Since repayment history is one of the main factors deciding your credit score, make sure you pay your monthly EMI’s on time.

 

2) CREDIT UTILIZATION LIMIT - Credit utilization amount is calculated by dividing the amount payable with the credit limit. Showing an inability to reorganize your spending habits as per your means can negatively affect your credit score. Increase in credit utilization beyond a certain limit creates a bad impression as it shows an irresponsible financial behavior.

 

3) NUMBER OF CREDIT INQUIRIES - While checking your credit report to assess your repayment potential, a person who has applied for credit/loan from several institutions makes it look as if the person is credit hungry and this creates an impression that the person may have trouble paying back their loan instalments in the future.

 

4) LENGTH OF CREDIT HISTORY - When applying for a loan, the potential lenders make a detailed report of your credit history. Potential lenders see your credit behavior from the first time you have availed credit. A positive and long credit history boosts your credit score as the lenders appreciate a positive and consistent repayment history over time.

 

HOW TO INCREASE YOUR CREDIT SCORE

1) REPAY LOAN EMI’s ON TIME - Paying your EMI’s on time helps in improving your credit score. Avoid having the EMI cheque bounce on presentation from your account as the same will negatively impact your credit score even if you pay the EMI amount after that.

2) REPAY CREDIT DUES ON TIME - Paying outstanding credit bills can help in improving your credit score. This can be done by getting into the cycle of paying the basic amount due as it appears to avoid a late payment If not done regularly, it leads to a mountain of debt which may cause a few late payments and will negatively affect your score.

3) BE AWARE WHILE BECOMING A GUARANTOR IN SOMEONE ELSE’S LOAN – Even if the other person is your close friend or relative, you should check their credit worthiness before signing up as a guarantor. If the repayment is defaulted or missed by the borrower, credit score of the guarantor will also be negatively impacted as per the legal liability, even if the guarantor is repaying all their loans on time.

4) TAKE LOANS/ CREDIT ONLY AS PER YOUR REPAYMENT CAPACITY & REQUIREMENT– Do not over leverage yourself with credits/loan you do not require, even if they are being offered the same attractive terms. It is important that repayment of all the availed loans should be made in a timely manner on or before the due dates.