Measures to enhance your Credit history and score

For an individual planning to apply for a loan or a credit card, the most important factor that a lender/bank considers is the CIBIL (Credit Information Bureau (India) Limited) report and score of that individual, besides his/her income. Hence, it is imperative that the individual checks his/her credit report, showing the credit history and score, before applying for a loan/credit card, so that his/her application is viewed favourably by the lender/bank.

Concept

What is a credit score?

A credit score is a numerical indicator of an individual’s credit history, showing his/her financial and credit health. The score of an individual is calculated by CIBIL using advanced analytical tools, following which it assigns a number between 300 and 900 to a borrower based on his/her credit history. The prospects of a borrower getting his/her loan application request approved is higher if his/her credit score is closer to 900. This will boost the confidence in the lender about the borrower’s capability to repay the loan in a timely manner. Different banks have different cut-off credit scores for considering loan applications based on their credit sanctioning policies. For most banks, the credit score of borrowers should be 750 and above.

How to improve your Credit score?

Borrowers with a healthy credit score, who have not defaulted in loan repayments in the past, can avail of loans/credit cards without much hassles. However, for individuals with a low credit score due to poor credit history resulting from default /delay in loan repayments can work on improving their score in future. If the individual follows strict financial discipline by way to timely repayment of loan and credit card EMIs, then his/her credit score and history will improve significantly. This will increase his/her chances of being eligible for a fresh loan in future.

There are various measure that an individual can follow to improve his/her credit score:

· Avoid late payments or defaults:   It is important to avoid late payments or defaults of existing loans/ credit card EMIs as lender will have an impression that the individual will not be able to fulfil the financial obligation for which he seeks a loan.

· Minimise credit card utilization limit: Increased spending on the credit card may not necessarily impact an individual’s credit score negatively. However, an increase in the current balance on the card over a period of time would indicate the increased repayment burden, which is likely to have a negative impact on the credit score in the long run.

· Maintaining a healthy mix of credit: It would be more beneficial for an individual to maintain a higher percentage of Secured loans (home loans, auto loans etc.). This is because these loans will have a positive bearing on an individual’s credit score compared to Unsecured loans (Personal loan, overdraft etc.). Even though unsecured loans are more easily available their rate of interest is higher. Therefore, the higher the number of unsecured loans availed by an individual, the greater would be the repayments that he/she would have to make by way of higher interests.

· Avoid going for too many credit facilities: The possibility of an individual’s loan request being approved by a lender is lesser if he has applied for many loans/credit facilities in the recent past. It indicates that the individual’s debt burden has increased considerably and is likely to increase even more going by his penchant for availing credit facilities.

· Monitor the progress of loan accounts for which an individual has stood as a co-signed or joint-account holder

· Monitor frequently accounts for which the individual has stood as a ‘guarantor’.

· Frequent review of an individual’s credit history and score.

Check CIBIL report

It is advisable that an individual planning to avail of a loan/credit card checks his/her CIBIL report, which shows his/her credit history and score. It is also important to note that the CIBIL report not only points out whether an individual qualifies for availing of a loan, but also the terms and conditions on which the loan can be availed. The higher the credit score of the individual, the greater is his/her possibility of availing of the loan on favourable terms.