It is not uncommon these days to have someone mention the credit report or credit score as a topic of discussion, especially when discussing the matter of one’s financial health. This is owing to the greater awareness on the topic over the past few years, given that in today’s times practically no financial transaction (especially when it comes to availing of a loan or credit card) can go through without a quick credit check. This all-important scrutiny is conducted by the lender in question, be it a bank or financial institution to ascertain the borrower’s financial standing.
Ranging between 300 and 900 typically, a credit score is derived from the more detailed credit information report popularly known as CIBIL report, which is nothing but information pertaining to the loan accounts and credit card accounts that an individual has availed of, whether currently or even in the past. It takes into account how the accounts have been serviced by the person, and exemplary behaviour will naturally result in a higher score, as compared to someone who has been possibly lax or negligent with maintaining their credit health. With CIBIL (one of the four credit bureaus in India), a score of 750 and above is normally considered to be a good score by most lenders.
How does the credit score matter?
With a good credit score, when you apply for a fresh line of credit lenders are more likely to look at your application more favourably and the chances of application rejection are immediately lowered. Of course no lender views the score in isolation so other factors do play a prominent role as well, but the score is the first piece of information that practically serves as a means to screen any loan or credit card application.
Let us take an example. Two people who apply for the same value of home loan, for the same tenure have different credit scores, one of which is a score of 780, while the other score is 670. As a result the person with the higher score not only gets the loan amount they had applied for, but at the most competitive interest rate, which brings down the cost of the loan and subsequent purchase. The person with a lower score can face one of two scenarios, that is, the possibility of the loan amount being downsized, hence the person would need to shell out a larger amount by way of down payment which is out of pocket, and second, the interest rate may be higher. This in the long run increases the cost, because you naturally pay more by way of the interest cost. In case of someone with a very low score, it is likely that the loan is rejected at the outset entirely, when even other factors may not be enough to act as mitigants.
How can you better your credit score?
Every time your credit card statement comes in, ensure that your payment is made on time, on or before the due date, and there is no delayed payment or even a missed one entirely. When it comes to other existing loans, make sure that in a similar fashion you make the EMI repayments regularly. Any slipup on either count can drastically impact your credit score negatively.
Remember that for your score to dip on account of bad credit behaviour does not take time, however when you wish to reverse the damage, the process takes a lot more financial discipline and patience. Instead of working backwards then, to improve a bad credit score, it is more prudent to work diligently to ensure that your score remains good and over a period of time, only gets better.
In India currently the use of credit scores is more or less restricted to the financial services industry, whereas overseas in most developed nations, the score plays an important role even when it comes to determining your insurance premium, the amount of deposit you would need to set down for a new phone connection, or even for a landlord to determine whether they would want to rent out a house to you.
Hence, it becomes obvious that the value attached to a good score today is too important to give a miss to, and hence to ensure a smooth financial life, there is nothing more critical than your credit information report, and the credit score thereof.