Do you understand the importance of maintaining a good credit score ? Let me explain with an example. Sometime ago at a Diwali party, one of the game prizes that was given away was for the highest number of credit cards that a person held. The winner of the game had 22 credit cards in his bulging wallet – obviously he did not know about how many credit cards he should have had or how credit card debt works. This story is not to give you advice about managing your credit cards but a more intrinsic matter – the importance of maintaining a good credit score.
Managing your credit as a whole to make you a prime borrower by having a high scoring credit report always helps when you want to take on loans to purchase your life dreams like buying a house or sending your daughter off for studies.
The importance of maintaining a good credit score – important facts
A credit report is a document issued by a credit information bureau that contains all the information on an individual’s credit history. This information is supplied to the bureau by its members (banks and other institutions). This pooled information is then accessed by its members when they want to evaluate and determine an individual’s credit risk and credit rating. To have a credit report, you need to have a minimum credit history of six months i.e. you should have held a credit card or have had some borrowing.
There are four credit bureaus in India : Credit Information Bureau (India) Ltd (CIBIL), Experian, Equifax Credit Information Services and Highmark Credit Information Services.
CIBIL is the oldest credit bureau in India and has many banks/institutions as its members, giving credence and depth to the information they provide. Besides giving information to the lenders, CIBIL also provides credit scores to individual borrowers for a fee of Rs 450.
Credit score is a result of complicated statistical analysis of the information that is available in your credit report. The score is a 3-digit number ranging from 300-900. The higher your score (it should be atleast 700) the higher your chances at getting credit. Other bureaus have similar rating systems. Earlier, even a low score did not hinder consumers from getting loans. Now banks are prudent and most borrowers who are being given loans are the ones that have a high score. Hence, investors should focus on the importance of maintaining a good credit score.
Basically when you apply for a loan or a credit card, the bank will check your credit score to understand your credit and payment history and to assess the risk of lending to you. Let’s say Sameer Arora, a 33 year old software engineer applies for a car loan. He already holds a home loan for Rs 25 lacs which he took around a year ago. All his payments have been on time. Sameer also holds 3 credit cards. When he applied for a car loan, he got rejected by the first bank and got a higher rate from the second bank who granted him the loan.
His credit score was quite low due to multiple loan inquiries which he had made over the years and his frequent credit rollover with minimal payment. This led to the rejection of car loan from the first bank and finally a higher rate of interest from the second bank. Sameer obviously did not know the importance of maintaining a good credit score.
Tonnes of E Books, E Courses, Newsletters, Tips & Tricks: Join Us & Feel the Change
Let's us start by sharing 2 E Books on Wealth Creation
Factors which drive the importance of maintaining a good credit score
Payment History: The most important factor is how promptly you pay your bills – especially credit card bills. Late payments, rolling over your debt regularly and defaulting on your EMIs will have a negative impact. Upto 36 months of history appeals on the report and even one default marks a strike against you.
Multiple new credit facilities: If a loan provider observes that you have recently been sanctioned a number of new credit facilities, it would mean that your monthly outflow in terms of EMIs are likely to have increased. Hence, it may have a negative impact on your loan application.
Outstanding loans: The bank/lender will want to check what is the outstanding loan amount and your monthly outgoing in terms of EMIs.
New Credit Inquiries: Don’t apply for unnecessary credit. This can signal that you are taking on a lot of debt, which worries lenders.
Tips to keep your credit score high
- Avoid defaulting on payments on your loans, credit cards or bills and try your best to make complete payments instead of paying minimum balances due on credit cards. A default will bring down your score sharply.
- If you have paid off a loan but your credit report doesn’t show this, contact the lender and ask them to make the necessary changes.
- Do not let accounts lie dormant, close down any account not in use.
- Your credit information report is not infallible. There could be mistakes, do generate and check your credit report regularly, Ensure that you report mistakes and have them corrected.
- Monitor your co-signed and joint accounts regularly. In co-signed or jointly held accounts, you are held equally liable for missed payments. This is extremely important because your joint holder’s negligence could affect your ability to access credit when you need it.
- Maintain a mix of credit. If possible, your credit history should contain a mix of a home loan, auto loan and a couple of credit cards. A high number of just credit cards may affect the chances of a loan approval negatively