What Is A Credit Score?

You are planning to take a loan for the most favorite car you had thought once buying or a house you always had imagined or the business you wished to expand, would take you to a journey of going to banks, making inquiries, checking the best quote and the interest rate offered to you and then finally deciding which option would suit you the best in terms of tenor, rate of interest, processing fees and pre-payment charges. Now the point is, how do banks or non-banking financial institutions decide the rate of interest or other charges? What are the criteria?

Suppose you and your friend went to a bank. You both earn almost the same, your age is same, the family background is also similar. And you both apply for the same loan is the same bank. But you were offered 11.5% interest rate whereas your friend was offered 10.25% interest rate with little lesser processing fees and pre-payment charges. Now that would make you think if the external factor looks the same, why are the other things different? So you finally decide to know the details deeply of why your friend was given lower rates than you. And here would be the analysis of what you would get.

You had never done a CIBIL Score Check. Which is one of the major factor of the interest rates being processed? Lower the credit score more is the interest rate and vice-versa. The credit score ranges from 300-900. Where 300 is the lowest and 900 is the highest. Any sore beyond 750 is considered a good score. People below this score are considered red zoned, and the one above 750 are greed zoned. It’s not that, if you have a score below 750 you will not get a loan, but the % of interest will be higher. Now let us take into consideration that why is the score low or high? Basically, what are the factors that decide the score? There are 5 factors whose combination results in the score.

  1. Payment History (35%)

The major factor which determined your credit score is the payment history. How well-organized you are in making the payments of the credits you have taken, shows how responsible you are. Banks can make a note of your previous payments and decide if you will be an asset for them or not. If previously you have made blunders in payments or didn’t pay regularly, the score dips badly and makes it difficult for you to get a loan. If the score is not good, and it’s becoming difficult for you to get a loan; in that case, you can try for loans for bad credit. But ultimately the loss will be yours only.

  1. Amount owed (30%)

The total amount which is taken by you, in any means of the credit i.e. by credit card or a loan also has second major thing determined in the score. The amount of the revolving credit and the fixed credit is in the amount owed.

  1. Length of credit history (15%)

How long is your credit account active, and how old is your account also determines your score. Some people make the mistake of closing the older accounts thinking they are not of any use but that creates a dip in the score. So,  keep the accounts active.

  1. Types of Credits (10%)

There are 2 types of credit. Fixed or installment based credit and revolving credit with a mix of secured and unsecured credit. The type of credit you have will also contribute in the score. It’s healthy if you have a good mix of all types of credit.

  1. New Credit (10%)

The new credits you take is also a determining factor of your score. New credit means you are becoming more responsible towards your repaying responsibility. But do not overdo, else this would also hamper your score.

Always manage the credits you take responsibly. If you check your score and you feel there is some mistake, get a detailed report and check. Work with that diligently and patiently to get your score in green zone!

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Is My Income Part Of My Credit Report?

There are a lot of people who do not know what a credit score is and how it is calculated. Many of us only come to know about a credit score after a loan or a financial product gets rejected. After getting such news you try to get your credit report to understand where you went wrong and start making attempts to build up your credit score. While building a score from scratch, you will try finding easy ways to get the score up in no time to avail a financial product. You make all your payments on time, use less limit on your credit card but you do not find a significant impact on your report. Suddenly something clicks in your mind, can my salary be a part of my credit report?

The answer to this question is a NO! Your salary or any type of monetary gains can never be a part of your cibil report. Other than income, factors like, color, race, religion, marital status, gender, occupation, where you live, etc. do not contribute to your credit score.

There are a lot of factors which contribute to your cibil score but salary is not one of them. Factors like your payment history contributes 35% to your score, the amount owed will be 30%; length of credit history contributes 15%, 10% of new credit and 10% on types of credits used.

A credit report is designed to analyze your financial behaviors and if you can default a new line of credit. It makes the lender’s job easy to understand if you are credit worthy and if they can provide you a loan or a financial product. The lender will definitely check your incomes and gains to understand your repayment capability but it will also check your credit report for any past defaults.

One of the reasons why your salary is not listed on the report is because the credit bureaus seek information from lenders, creditors and collection agencies; they do not take any self-provided data from consumers as they may have fake information. The employers also are not comfortable sharing the packages to bureaus as this kind of information is confidential. There can be instances, the competitor company can pull any employee’s records of how much package are you offering and can headhunt your candidate, as credit report information is easily available these days.

How can you bank on your income?   

You can use your income to do a lot of things financially. You can invest in insurances, which is termed to be good investment. The payments you make for your insurance policies are reflected on your report which than helps you improve cibil score.

There are instances, when you need urgent funds and you cannot rely on your family members. You can show your stable income proofs to the bank or any lender for a quick loan which can help you with quick funds. When lenders make decision on giving you a line of credit, your salary is always a key factor while considering your credit worthiness.

Once you have availed a loan, make sure to make timely payments to the bank, so that your credit score up rises from time to time and when the time comes, you avail a bigger loan like a home loan or a luxury car loan with ease.

The other ways to bank on your salary in financial market is to apply for credit cards. Credit cards play an important role in everyone’s life if used properly. A credit card can be a boon at emergency times and can be a source to quick funds. If you have a good income structure, you can apply for a credit card with good upper limit. Card lenders consider your salary and gains when they accept application to determine if you are a car worthy individual and also what would be your credit limit. Owning a credit card can help you many ways including improving your credit score.

If you are on the way to build a good credit score, don’t feel bad if your salary is not considered as a component to calculate your cibil score. You can use other ways to build a good score, where your salary can play an indirect role. Just utilize your salary wisely and make all your payments on time, you will see a great hike on your cibil score in no time.

The 4 Things That Affect Your Credit Score

It’s foolhardy to underestimate the significance of CIBIL score. You might be earning a sizeable income and have multiple assets to your name, but if your CIBIL score is not up to the mark, you can lose the very chance of obtaining a personal loan, home loan, or rather any other type of credit from a bank.

Fortunately, it’s never too late to start caring about your CIBIL score calculation. So, if you want to become more careful with your credit usage, it can help to learn about the top 4 things that affect your CIBIL score:

  1. Payment History

Late payments are often the biggest reason behind a low CIBIL score. These include credit card bills, loan EMIs, etc.

When you don’t pay your credit card bills, etc. on time, it reflects irresponsibility towards money management. Moreover, it shows that you can’t be trusted with credit. Thus, credit rating companies such as CIBIL, Equifax, etc. can deduct a large number of points from your score.

If you want to increase credit score in the fastest way possible, then just start paying your bills on time. Set up reminders on your phone if need be, but make sure that you don’t delay a single payment ever.

  1. High Credit Utilization

Credit utilization plays a big role in CIBIL score calculation, but what’s it exactly?

Credit utilization is the ratio of the amount of credit you spend every month on average to the amount of total credit available to you.

For instance, if you have 2 credit cards, with Rs. 50,000 credit limit on each, then the total credit available becomes Rs. 1 lakh. Now, if your monthly expenditure with the cards is about Rs. 60,000, then the credit utilization ratio becomes:

60,000/100,000 = 0.60 = 60%

If your credit utilization ratio is high, then it can have a negative impact on your score. Although the exact threshold varies from one credit bureau to another, usually it’s around 35% to 40%.

So, by lowering the credit utilization ratio you can increase credit score. The following are two ways you can do that:

  • You can stop using your credit cards frequently. Instead, make payments via mobile wallets, net banking, or even cash.
  • Get a new credit card so that the overall limit is increased and the credit utilization ratio is lowered.
  1. Credit Report Discrepancies

When was the last time you checked your CIBIL report? If there are any mistakes in your personal details, banking data, etc. in your report then it can affect your CIBIL score calculation.

To make sure that your CIBIL report doesn’t damage your credit score, it’s important that you go through an updated copy every now and then. The following are some of the things you should look for: unfamiliar credit card/loan accounts; discrepancies in payment history, personal details, etc.; and false tags such as “settled account”, “defaulting”, etc.

  1. Too Many Loan Requests

When you need a personal loan or a home loan on an urgent basis, then it’s natural to assume that submitting multiple applications to multiple banks can greatly increase your odds of getting an approval from at least one lender. However, nothing can be further from the truth.

When you send out the loan applications at the same time, credit bureaus sense an urgency in this behavior which is not good from the lender’s perspective. Thus, your score could take some damage by this.

In other words, rather than increasing the possibility of you getting a loan, sending multiple loan applications around the same time, can, in fact, lower your odds even further.

If you really want to make sure that you get a loan in the first few attempts, then you must check your CIBIL report first. If it’s all good, you can get a loan without a problem. If it’s not, then you can improve it first, and apply for the loan only after that.

So, these were the most common things that can affect your CIBIL score. Be sure to adjust your credit behavior accordingly so that no only you can prevent your score from any damage, but rather increase it even further.

Is a ‘Perfect’ Credit Score Even Possible? Or It’s a Myth?

The credit score is globally accepted as a signpost to a person’s credit worth. Banks and financial institutions consider this three digit number as a hallmark of your repayment capability. They gauge the risk factor associated with each loan application considering the credit score of the applicant.

In India CIBIL score is primarily considered as the benchmark of a person’s credit score. Credit Information Bureau of India and TransUnion CIBIL Limited are some of the other names of CIBIL which is the premium credit agency of India. It is country’s first credit bureau which modeled a systematic credit scoring system for banks and financial systems.

The CIBIL score is calculated between 300 to 900 points, wherein 900 is the perfect score while 300 is the lowest score. The more closer an individual or a business is to 900 CIBIL score, the better is their credit worth in the eyes of a lender. According to CIBIL 80 % of people with 750 or above points are granted loans by banks.

It is worthwhile to consider here if a good score a guarantee to loan approval? And for that matter, is it practical to get a perfect credit score such as 900 CIBIL points? Is it even possible to attain the perfection or it is just a myth?

It is not possible to state an absolute calculation on what causes low CIBIL score and why. So, let’s find out what compounds a CIBIL score to reach to point of understanding for this query.

Credit score calculations factor in too many aspects which are not absolute in nature and may vary from person to person. Every individual and business vary in terms of their credit worth and so does the impact of their financial moves.

However we can inscribe 5 common factors that affect credit score calculation globally:

  1. Repayments
    To maintain a good credit score, timely repayment of loans and credit bills is a must criterion. Indeed it is one of the key factors that define the stature of your score. According to CIBIL reports discipline in credit repayment can boost your score by 30 to 35 percent. Thus diligent repayment could be your first step towards the perfect CIBIL score.
  2. Credit utilization ratio
    As important it is to repay on time as is to keep a check on your credit accounts. You should always ensure that you do not overuse the credit limit offered to you. Those who exhaust their limit every month are less likely to have a good score. Lenders assume that you are short of cash and your financial situation might be not be as sound for a perfect score. So, using more than your credit limit has a negative impact on your credit report. Indeed it is recommended to limit your credit use far below 30% of total approved limit.
  3. Query
    Always ensure that you do not make multiple queries in a small period of time. Every time you make a query for loan or a credit card, it is marked on your credit report. Frequent queries
    on your report signify credit hungry nature and thus make you financially less strong.

 

  1. Credit mix
    Every time you borrow or use a credit product, the lender undertakes a risk. They charge interest rate to cover up this risk. When you borrow against a property or some other collateral the risk is substantially reduced and thus you are offered a better rate of interest. With this said, I hope it is clear why you should maintain a right credit mix of secured and unsecured loans. Too many unsecured loans restrict your score.
  2. Length of credit

The length of credit history also affects the score. The older is the good history the better effect it will have on your credit report. Thus those who have older history are rated better than new borrowers. This is also why when you close an old credit card with good history, it affects your score negatively.

 

Knowing these factors you can ensure a good score during all the seasons of your life. If however you target the perfection, you need to frequently check your credit report and monitor every activity that hurts your score.

3 Strategies to Help You Save Money Now and in the Future

When you are young and just started out in the world, it’s easy to think that money is nothing and spend what you earn. Have you ever given a thought that saving money will not only help you build a secure future but also will add supplement when you make huge plans for life. In this decade we are living in, we are surrounded by a lot of unwanted things and the temptation to have them all. What we do not understand is we are spending a fortune on luxury without giving a thought on the future. These practices lead to bankruptcy and result to taking a loan and if you do not pay your EMIs on time your credit score will go for a toss. Do you know your cibil score calculation? And if you don’t, then steps to enhance your credit score?

How does the temptation to buy or spend on luxury things rises? In every group there will be friend who buys the latest IPhone every year and flaunts it whenever you meet. It gives you a thought, should I buy the same phone to live up to my friend’s standards and end up buying a similar phone. What you do not realize is that, just for sake of status you spent a fortune on a phone which will prove worthless after a year when a new model releases and then you will be going after that phone as well.

Just to avoid such perceptive buying and spending, today we will be sharing you three best strategies to lower your expenses and save for a better future,

Set your priorities straight;

Everyone has their own priorities; the priorities can be of two types and can be categorized into needs and wants. Try understanding your needs over wants, for example buying a car for your commute is a need but buying a Mercedes or a BMW for your commute is a want. You can always cut down on a lot of your wants and start contributing for what your needs are. Make a priority list of things you need with the age when you expect to achieve it. We can set some priority points which are common in everyone’s life and you can start from this,

For emergencies you do not know what can happen at any time, always be prepared for the worse. It can be a broken mobile screen; you lost your job in some company and need at least three months of financial backup, any medical emergencies.

For Education a good education plays a vital role in everyone’s life and where does good education come from? It comes from great educational institution. Instead of opting for an education loan try saving money for the same.

For home buying this is a big step in your life, buying a dream house is no joke, there is a lot of planning and savings involved in the same. If you start saving money from today who knows you may land up in your dream house without hassles of taking home loan.

For retirement after a long innings in your money making life, you will be expecting a comfortable life after retirement so you can save for your retirement and spend the rest of your life in financial peace.

Always plan to save

 We all know nothing is impossible without proper planning; the same goes with financial planning where you are supposed to make plans on savings and track them on a regular basis whether  you are adhering the same.

Build a budget for saving every month is not the same, you may encounter emergencies and you may have to spend your savings but building a budget will not harm you. Build a budget you would like to save from your earnings and stick to it. One tip: try saving in a bank account with no debit card and internet banking so that you do not tempt to use that money for luxury.

Track your expenses after you make a budget track your expenses, where you are spending, how much you are spending. If needed cut some luxury of availing public transport for short distances, go by walk.

Make secured investment these days you can make secured investment like fixed deposits, recurring deposits and so which will guarantee you good returns in short tenure.

Stick to your plan

 It’s just like a new year’s resolution where you promise yourself to get fit this year and workout a good two weeks and after that stop going to the gym and your resolution goes for a toss. If you have made a financial plan stick to it no matter what.

Something is better than nothing is the quote we should stick to, and start saving from today. You do not know what life has for us; it can be sweet pleasures or bitter pain. For such bitter pain be prepared and start saving from today.

Four Steps to a Healthier Credit Report

Credit scores are important as they are not only an indication of financial well being and discipline but it also a crucial factor in getting a loan application accepted or rejected. Thus it makes sense for you to be aware of what contributes to making a good or bad credit rating so that you can aim to have a healthy credit report. Here we look at a few aspects that contribute to a healthier credit score.

How to Get a Healthier Credit Score:

Five factors impact CIBIL score calculation and taking care of these factors will ensure that you have a good rating that will allow you to have access to credit if you so require.

  1. Ensure Timely Payments: This is the most crucial factor in the credit score calculation. Thus paying on time is the best way to a healthier score. So whether it’s the EMIs or credit card bills remember to always them before the due date or by the due date. This simple rule will go a long way in maintaining a good score. If you have not done this in the past it is never too late to remedy your ways. While paying on time going forward will not immediately improve the score but it will have a positive impact over a long period of time and the negative impact of late payments each month will reduce. Plus it’s a great way to get you off the loan defaulter list and better your chances of getting a loan approved.
  2. Use the Credit Cards Wisely: Credit cards come with a sanctioned credit limit; this is the maximum amount that the user can spend without paying the dues. Thus if your card has a sanctioned limit of Rs. 100,000 then this means you have access to credit up to Rs. 100,000 per billing cycle. However this does not meant that you actually need to spend an amount equal to the sanctioned limit. Actually it is good idea to keep the spending below or equal to 30%-35% of the sanctioned limit on a regular basis. A low credit utilization ration (usage/sanctioned limit) has a positive impact on the credit score and after the credit repayment history it is the most important factor when calculating the score.
  3. Eliminate Old Dues: If one is looking at getting a healthier credit report card then it is mostly a long term process. Improving the rating takes time but eliminating old dues is something that can have an immediate impact if done correctly. If you have pending dues that are reflected in your CIR then take care of them in the right way to see an improvement in the score. When you repay old dues remember to pay the entire amount and in case you do negotiate with the lender then do ensure that the lender does not report it is “settled”. A settled debt is never a good sign and would not improve the score and may have an opposite impact. Having said that paying an old debt does not mean that the delays and missed payment are removed from payment history but the debt will not show as an overdue amount in future reports which is bound to have a positive impact.
  4. Avoid Credit Enquiries: Needless to say one must apply for a loan only when one requires it! Each time one applies for a loan the prospective lender seeks the credit report of the applicant. This is known as a hard enquiry; enquiries are one of the five factors that influence the CIBIL score calculation. Even when one needs a loan and applies for it then make sure you make a thorough check about the lender’s eligibility criterion and the required documentation. This will ensure that there are no unnecessary credit enquiries and you apply to lenders only where you have a fair chance of getting the loan application accepted.

Staying credit healthy should not be something that one does once in a while and them forgets about it. Inculcating healthy credit habits and being financially disciplined ensures that one remains credit healthy throughout! Just like are financial and physical health we need to take care of our credit health too.

How To Build An Excellent Credit Score Without Borrowing Money?

To enjoy easy credit tomorrow, it is a must that you have a good credit history and score today. But who says you need to borrow to build the score? It is a big myth. You need not fall into the debt trap for building a length of history. You can certainly build an excellent credit score without borrowing money. Here goes a simple 3 step process to build CIBIL score without a loan.

shutterstock_223493974Step 1:

First things first, understand how to check CIBIL Score. You need to fulfil following points:

  1. Pay all your dues on time. Being regular on your payments gives 35 % boost to the score.
  2. Keep your credit utilisation and loan to income ratio low. This adds up to 30 % to score.
  3. Have positive credit history. The age of your credit length also brings positive impact on score. It can help score up to 15 %.
  4. Have a right mix of secured and unsecured debts. It accounts for 10 % of your score.
  5. How frequently and recently you apply for loan also impacts your loan approval decision. This again holds 10 % weightage.

Once you achieve understanding on CIBIL Score calculation, your score tends to reach excellent levels.

 

Step 2:

Now as our goal is to avoid the debt trap, I will share a simple line of credit that will help you build credit history and that too, without borrowing! You can save borrowing decision for the rainy day!

 

If you guessed it, you guessed it right. It is your credit card.

 

Yup, you can use plastic money to your advantage and raise the score. To completely use the advantage, make sure you have a card that doesn’t charge you interest when you pay in full beforehand. Thus second step is to get a no interest credit card for building the score. You can compare credit cards offered by different banks online. As per your needs you can choose one.

 

Step 3:

We all have fixed monthly expenses such as mobile bill, TV connection bill, water bill, electricity bill and many more bills. All you have to do is pay one or more of these expenses through your credit cards month on month.

 

Say, you choose to pay your phone bill with a credit card. If you do so, every month you would build a balance on your credit card statement. By paying out the expenses in full by your card, you would technically repay the monthly outstanding credit on card. It is best to automate the process so that every month a timely transaction is fixed on your card.

 

This way you would build good history every month, without borrowing anything.

 

Next, note another point of advantage here. Say your credit card has limit of Rs 50,000. Your monthly telephone expense is Rs 1000. Now even if you set automatic payment method, every month you are using just Rs 1000 on the limit of Rs 50,000. This factors plays a very strong role in boosting your score.

 

The line of benefits do not end here. Not to forget the cash back and other add on benefits you get on credit cards. So you are not borrowing but getting paid to build your score!

 

Within a year or two, you would be able to reach excellent credit score just by being regular on your payments and not using much of the limit. However keep certain points in mind before you follow the above steps.

  1. Always be regular on your payment. Missing any payment would bring bad history, beware! The whole purpose of this exercise will fail if you miss the payment.
  2. Do not be co guarantor to a friend or relative. Remember you are saving your credit potential for future when you would apply for an auto loan, home loan or personal loan. If your co-applicant delays or defaults it would directly hurt your credit report. So do not take a chance by signing as a guarantor.
  3. As important is your credit score, as is your spouse’s score. It is always advisable to not reply on single member score in the family and ensure to build good score of your partner as well.
  4. Your score is not compulsively everything. Do not over burden yourself for 900 score target. If your score is above 750 it is considered as good score.

 

I hope now you would easily build an excellent score without borrowing money. All the best!

There Is a Big Difference Between Credit Report and Credit Score

This title may seem a bit absurd to you but it is not. Both seem to be similar terms, both are recorded by CIBIL and both are used by lenders to assess your credit worthiness. Yet, there is actually a difference in your credit score and your credit report. It will be easy for you to understand the difference after you have read this article.

Imagine this. You have appeared for an exam regarding your debts taken and how you have used your credit card etc. Your score is the number of marks you have obtained in the exam. Your report gives an account of your performance in words throughout the year, your answers to questions in the exam and also your teacher’s comments. When you apply for a new loan, it is like you have applied for admission to a new institution and the principal of that institution would like to read your previous report card first. She then looks at your score, which are your marks and your answers and teacher’s comments. Based on this she decides whether to give you an admission or not. There could be no simpler explanation than this.

It is true that you may have a score of 700 but your loan application may be rejected due to reasons in your Credit Information Report. While it is important to increase credit score, it is equally important to make sure you have a good credit report backing it.

One of the main difference is that your report contains data for atleast 36 months where as your score is calculated according to past 24 months’ data.

Your Credit Score

Your CIBIL TransUnion Score or, as commonly referred to, your credit score, is a three digit number which is calculated according to a proprietary formula using information given in your credit report under the “accounts” and “enquiries” section. Your credit report is a worded document that holds factual information. CIBIL uses this information to calculate your score. Your score may be anything between 300 & 900. The higher the score, the better it is while the lower the score the poorer it is considered.

Primarily these are the factors that affect your score. They are:

  1. On time Payments: Incase you have a record of always paying your loan instalments or credit card dues on time, then you will be rewarded for your diligent behaviour with a higher score. Details of such payments are recorded in the CIR in a schedule, showing month wise payments you went past due. This schedule is maintained for 36 months.
  1. Unsecure versus Secured Loans: Your score is higher if the fraction of secured loans like home loan or car loan or loan against property, is higher than unsecured loans like personal loan, credit cards or education loans, in your total debt portfolio.
  1. Number of “Hard Enquiries”: Once you apply to use a credit facility, you authorise the lender to withdraw your CIBIL report. Whenever a lender draws your credit report it is termed as a “hard enquiry”. The more the number of such enquiries, the poorer will be your score because it shows that you are constantly in need of more credit and are not able to handle the funds wisely.

A glance at your score is enough for a future lender to make judgements about your credit past. A lower score will make the lender assume that you have not been responsible with your payments, you have more unsecured loans or that you are always seeking fresh credit. How many of such assumptions are true, the lender will find out by reading your report in detail.

A score of “NA” or “NH” means, either your credit history is not six months old or that you have had no credit relationship for atleast the last 24 months.

Your Credit Information Report

This report is the power house of information on your credit history. The CIR records previous information and is periodically updated by CIBIL as per the information received from its members.

  1. Using more credit limit: There is no direct bearing on your score if you use the entire credit limit. But it does impress upon lenders that you may come under huge debt burden by using more credit.
  1. Income to EMI ratio: The thumb rule is that the total EMIs paid by you should not exceed 50% of your Income. Incase you are at a limit of 50% already then lenders will not sanction further loans to you. So even if you apply for a small personal loan and you may have a good score, based on this eligibility criterion, your application may be rejected.
  1. Disputes: Incase you find any discrepancy in your report you can raise a CIBIL dispute. But if you are not happy with your score, you cannot raise a ticket on CIBIL.
  1. Consumer Dispute Remarks: This field has been recently added to the credit report. Here the customer can choose remarks for accounts where a flag has been raised. Such remarks will be available on the report for atleast a year.
  1. Details recorded:
    1. Under the “Accounts” section of your report, the date of last payment, payment frequency (for eg: monthly) and Actual amount paid are recorded for every credit account.
    2. Information about all the loan accounts is maintained under “Accounts” section of your report. Details of total credit limit, sanctioned limit, rate of interest and outstanding balance are all recorded and updated periodically in your credit report. Details of collateral are also recorded in the report.
    3. Information regarding all “hard enquiries” is recorded under the “Enquiries” Section of your report.
    4. Loans on which you are a guarantor, an add-on card holder, status of accounts (closed, settled etc) are all recorded in the credit report.

Summary

The long and short of it is that even if you have a favourable score, you may face a rejected loan or credit card application due to unfavourable factors in your credit report. It is only vital and advisable that you plan your finances in such a way that both the elements are taken care of.

Common misconceptions about CIBIL score calculation

CIBIL or the Credit Information Bureau of India keeps a record of an individual’s credit related activities with all the financial institutions, lenders and banks (including outstanding balances, credit limits, EMI, credit card payments). This record gives an insight into a person’s credit usage patterns. CIBIL generates a three digit number called a CIBIL Score that summarises the credit information and aids in the evaluation of borrowers on a standard scale. Banks check the credit score and credit report to make their credit approval decisions.

As the significance of maintaining a good CIBIL Score is increasing, rampant myths have cropped up which have left people confused. This article attempts to debunk some of the widely spread misconceptions surrounding this financial tool.

Myth #1: Enquiring about your own CIBIL score will bring it down.

When you check your own credit report or score, it is considered a soft enquiry and is not taken into consideration while calculation the score. On the other hand when a lender checks on it for the purpose of evaluating your credibility it is a hard enquiry that gets recorded on the report and impacts the CIBIL score calculation. A series of loan applications in quick succession will generate multiple hard enquiries and have a negative bearing on the score. It is actually a good financial practice to keep a regular check on your score to track your credit health. You can check your score from the bureau by paying a nominal fee.

Myth #2: Close your credit cards to improve your score.

This is the most dangerous myth hovering around the CIBIL Score. Contrary to this belief, closing credit cards will actually bring the score down. When you forgo a card, your total available credit limit declines, and the credit utilization percentage increases. CIBIL score calculation largely takes into account the credit utilization ratio. A high ratio will push your score down.

Length of the credit history is another significant factor that affects CIBIL score calculation. So if you have old credit cards, in which you have displayed good credit behaviour, do not bother closing them. Firstly, a history of payments within the due dates on those cards will positively affect your score. Secondly, they add to the available credit limit you enjoy, and help in reducing the utilization ratio. Hence it makes sense to hold on to such cards, even if you do not use them.

Myth #3: Prefer cash over credit to raise your score.

Indians have grown up with the belief that borrowing money is a bad thing. On those lines they think that if they make cash payments and avoid credit completely it will keep their CIBIL Score in good shape. But contrary to this perception cash transactions do not have any bearing on the CIBIL score calculation. The one and only thing that affects the score is the credit history. If you do not use your credit line you cannot build your credit history and bureaus will not assign you any score at all. You will find it difficult to get loans sanctioned in case you need them for emergencies. The trick is to avail loans and make purchases with your credit cards, and make timely repayments. Such credit behaviour will be rewarded with an excellent credit score.

Myth #4: A bad credit score cannot be restored.

A credit score is a reflection of one’s financial behaviour at a particular point in time. In case you have a bad credit score, it may lessen your chances of loan approval in the near future, but it isn’t a closed chapter. With judicious planning you can get your financial life back on track. Apart from making on-time payments you can take help of professional help from credit management companies who will help you draw out a plan to restore your credit records.

Myth #5: CIBIL score calculation takes into account factors like Education level, Occupation, income, bank balance, place of living and marital status.

None of these factors play any role in calculating your CIBIL score. In fact CIBIL does not even have access to such information. A credit score only reflects how responsibly you handle your credit. It only depends on the credit information like the number of loans taken, total available credit limit, outstanding balances and credit repayment patterns.

Myth # 6: Being a guarantor does not affect credit score calculation.

You will not lose points on the credit score for acting as a guarantor for a loan taken by your friend. But if your friend fails to make timely payments of his debts the onus will lie on you. If you fail to pay the amount your credit score may plummet.

Credit scores affect your financial life significantly. Misconceptions and erroneous understanding regarding CIBIL Score calculation can lead to serious repercussions. Hence it is good to know what affects the score and what does not.

The Importance of Your Credit Score When Looking For a Home Loan

Real estate prices in India have scaled to unbelievable heights. Buying a house, atleast in the major cosmopolitans in India seems like a distant dream for most especially because the prices have exceeded a common man’s affordability. Inspite of the recent trends in property prices in India showing a marginal downturn, they still remain far above the ground.

To cover the gap between what a common man’s pocket can allow and what home sellers are asking for, a home loan must be sought. This article will quickly walk you through on why your credit score is such a big deal when you are looking for a home loan.

How to proceed when looking for a home loan?

It is important to mention here that banks and other non banking institutions that provide housing loan and are also member of CIBIL, withdraw a loan applicant’s credit report as a first step in evaluation of the loan application. Whether the applicant is seeking a secured debt or an unsecured debt it does not matter. Even for a thing as minor as a request for an upward revision of the credit limit on your credit card, sends a bank looking for your credit report. Most banks and other lenders are known to grant credit to those who have scores greater than or equal to atleast 750. Thus, what’s applicable for any other loan is applicable for home loan too. You should do a cibil score check every year to keep a eye on your score.

Banks and other non banking financial institutions do have their internal policies on credit scores and reports but none of them have ever openly disclosed their criteria. However, by and large 750+ scores are considered as very good score to get through the loan process at any bank, unless you lack a document or fail on other parameters of the lender.

How do I know my score?

Knowing your score is not complicated at all. You can get online and go to cibil’s website . Here you can request your copy of CIBIL report. After a payment of Rs. 550/- you can easily and instantly get yourself access to your score and report. Incase you do not want to invest money in withdrawing your report then you can also go to http://www.freescoreindia.com and request for a free credit score. Although free but you will receive it only three days after you have submitted a complete request. So, if you are not in a hurry, you may consider this alternative.

I know my score, now what?

Once you have received your copy of the report then give it a thorough look. Look at all the details carefully and make sure that they are all correct. Incase you find any false information then it is best to raise a CIBIL dispute and request for a rectification. The reason why you should be so cautious about all the details to be right is because there could be information that is hampering your score. Upon correction of that misleading information, not only will your score improve but also it will become easier for you to impress upon your prospective lenders.

For example, you may have paid in full an old used car loan some time ago but the lender has not reported this to CIBIL. However, the report shows the loan account as still “open” and running. Since CIBIL’s authority is limited to only collating data from its various members, it cannot update unless it has been notified from the bank itself. Thus, by having your data corrected, it will bring down your used credit limit and help increase your score.

I have a good score. Can I use it to my advantage?

Ofcourse! It may come as a pleasant surprise and it is true. Often we have heard that people with poor scores need to worry and not those with good scores. But that is so untrue. The truth is a good score helps the borrower more than the lender. This is so because it not only it means that you can easily seek credit upto the limit of your eligibility but also you can negotiate for favourable terms and a lower rate of interest. Banks and other lenders will be vying for your loan portfolio incase you have a good score. Therefore, you can certainly take advantage of competitive rates.

Are there any loans for someone with a poor score?

Well, ofcourse. Even with bad credit home loans can be acquired. There is a good chance that you may have to pay an interest rate higher than standard rates or you may have to get a guarantor on board or perhaps, get someone with a good credit standing to co-sign your application, but you certainly do not need to deprive yourself of a home loan.

Incase, unfortunately you do not hold a good score then do not lose heart. You can adopt credit healthy ways and work on improving your score. We have covered on our blog on how you can repair your broken credit.

Rejuvenate the power in your credit score

Like they say, “better late than never”.  Despite a poor score, by bringing discipline in your finances and making a fresh start will help you achieve a better score over a period of time. Avoid being nonchalant about your score, have patience and work on it actively. Once better then go after that loan you always wanted.

There may be chances that you do not have the skill required to negotiate on interest rates or you do not understand how you can bring in discipline in your investments. In this case, you must seek expertise of credit consulting companies who can do this job for you. Find comfort in the company of an expert and follow their advice.

Stay tuned for more credit updates!