Financial services in India is transforming at a rapid pace, making products and services more easily accessible. This has, however, led to a dependence on credit to meet one’s financial and lifestyle needs, which has made lending products like loans and cards rise in popularity. While people are getting comfortable with credit, a crucial concept that deeply impacts your financial health is your credit awareness. Being credit aware is all about behaving responsibly with credit and improving your creditworthiness.
Creditworthiness, simply put, is one’s ability to borrow money from financial institutions like your bank. So how can you check your creditworthiness?
Credit bureaus in India keep records of all credit consumers in the form of a credit report which is updated every month. Along with your past history, your credit report contains your credit score, a three-digit-number, which denotes how creditworthy you are.
The credit history in your credit report contains all financial transactions such as loans, credits and other mortgages taken by a person.
What is a credit report?
Your credit report is the report card of your credit history. It contains all details of your credit accounts – credit cards, loans, EMIs, late payments, outstanding debt etc. along with the personal details. All banks and financial institutions in India send all your details to credit bureaus that collate the information and update your credit score every month.
Each time you apply for a lending product like a loan or a credit card, lenders access your credit report to have a look at how you have behaved with your past credit and how creditworthy are you currently.
In case a person has committed blunders in repaying loans and credit card bills, this will be included in his credit report and also lower his credit score. Lower the credit score, higher will be the risk involved for lenders in sanctioning the loan.
Read More: Reasons for Low CIBIL Score
What is a Credit Score?
Credit score is a 3 digit number that signifies the creditworthiness of an applicant. It is calculated from the credit report that contains the credit history of the applicant. It lies between 300 and 900. Lower the credit score, lower is the creditworthiness of an applicant and more are the chances of loan default. Higher the credit score, better are chances of a loan approval.
Credit score depends on a number of factors, such as borrowing or repayment behaviour of the applicant, number of credit accounts (credit cards and loans), credit utilization ratio, etc.
What is a good credit score?
Different credit reporting agencies evaluate the credit score according to their own models and methodology. Thus, scores vary from one bureau to another. In India, there are 4 credit bureaus – Experian, Equifax, CIBIL and High Mark. Usually, a person having credit score above 750 is considered trustworthy by lenders for approving loans.
Why should we check credit report frequently?
Credit report shows how one has behaved with credit. All credit accounts associated with the person and his repayment history are mentioned in the report.
There might be cases when credit bureaus may not be able to collect exact data from the bank or the lender owing to which there may be a fall in your credit score even after you have paid off your credits on time. This is where checking credit report regularly has its significance. When you find an error in the credit report, you should file a grievance with the credit bureau and let them know of the mistake. Your report is regenerated in this case after verification and your good credit score is restored.
There are two basic reasons why you should check your credit score periodically, preferably every month:
- It helps detect frauds and errors in your credit report.
- It also helps in tracking your credit score and builds it.
How to improve the Credit Score?
Your credit score is an indicator of how well you have dealt with credit in the past and helps lenders evaluate how worthy are you for new credit. To improve your credit score, you can follow these simple but very effective steps:
- Pay your bills on time – It is the first and the foremost step to maintain and improve your credit score. You have to pay your credit card bills and all EMIs on time. If you don’t pay your bills on time, it may have a negative impact on your credit score.
- Pay off all pending dues – In case you have an outstanding debt to be paid, you should pay it off as early as possible. Pending bills can severely dampen your credit score. Even if you pay off your bills, the details are still mentioned in the DPD (Days Past Due) table which may be considered by credit bureaus while generating the credit score.
- Increase your Credit Utilisation Ratio (CUR) – The credit utilisation ratio is the ratio of total credit utilised against the total credit available. Lower the CUR, better is it for the credit score. The best option to improve your credit utilisation ratio is by getting a credit card having low/no annual charges. You can also try to decrease your spending on your credit card and in turn decrease the CUR which will eventually help in rebuilding your credit score.
- Don’t deactivate old credit cards – You should not deactivate your old credit cards. More the age of the credit card, more is the report available on it. If you have been disciplined in paying the dues, your creditworthiness will increase significantly and in turn will positively impact your credit score. Lenders consider people with older credit history more creditworthy than people with the same credit score but with relatively newer credit history.
- Refrain from purchasing multiple credit cards instantly – Do not purchase a number of credit cards to just increase your credit limit. It can backfire as well in many cases and you may end up lowering your credit score. Instead, you should plan your credit accounts wisely and maintain duration of about six months between two credit accounts. New credit accounts lower the average age of credit accounts. In case you do not have a number of old credit accounts, your credit score may be impacted severely.
- Set payment reminder – You should setup payment reminders for clearing your dues every month in case you have multiple accounts. You can also activate the auto-pay option to pay off the monthly payment on time automatically and prevent defaulting on it.
- Use credit cards judiciously – In case you use multiple credit cards, it is best advisable that you manage the payments in such a way that the utilization of each card is low and all of those are used judiciously. Excess usage of one card and no usage of the other one can cause serious issues and in turn impact your credit score.
Don’t deactivate credit cards – You should not close your credit card account even if there are defaults on it. Instead you should clear all your dues and utilize it smartly in future. Credit accounts always provide you an option to rebuild your credit score if you improve your financial behaviour. The credit history related to your deactivated credit card is still present on your credit report that may be considered by the credit bureau while giving you the credit score. If you close your account, you are deprived of the chance of rebuilding the score.