Importance of a High Credit Score

A high credit score plays a crucial role in securing one’s financial future. Maintaining a good credit score can easily help avail loans from the financial institutions at competitive rates. Through advanced analytics, the credit bureau assesses an individual’s credit details and then allocates a three-digit number ranging from 300 to 900. Most financial institutions are willing to lend funds to applicants with a score of 750 and above. For CIBIL score calculation, details such as repayment history and borrowing details, among other things, are taken into consideration. The score is analyzed to ascertain the potential risks involved in lending money to individuals.

How to maintain a good credit score?

If one has not taken credit yet, the secret to establishing and maintaining a good score is to start small. This can include holding one credit card instead of multiple cards from credit card companies or availing a small loan. It is also essential that timely payments get reported to the credit bureau. On getting a credit card, make sure that the balance gets paid in full and on time. If payments are delayed, it will not only affect one’s relationship with the credit card companies or company, it will also lower the credit score.

Checking on the credit report at least three times a year can help inculcate financial discipline as the individual becomes well informed about how he or she is managing funds. This helps to spot errors, if any, and also get it corrected immediately, before it can impact the scores. Credit report called Credit Information Report contains details of a person’s past credit history.

Importance of high credit score

Banks and other financial institutions take into account an individual’s credit score to determine whether or not to lend funds. The first impression that the lender has of the applicant is his/her credit score. Lower the credit score, higher will be the interest rate. Lenders can even demand collateral when they realize that the risk is high.

Personal loan, car loan and other kinds of loans can be availed with the help of a high credit score. For example one can avail the best home loans in India with a good credit score. Most home-loan providers are willing to consider scores of 700 and above. The closer the score is to 900 higher are the chances of getting a loan that meets all of the applicant’s terms. Therefore it can be concluded that one can get the best home loans in India through a good credit score. On the other hand, a bad credit score can dampen one’s chances of getting funds at competitive rates.

A high credit score can not only help get favourable loans but also lesser insurance premiums. The credit bureau allows insurance companies, broking firms etc. to access a client’s credit details. A poor score could result in payment of higher insurance premiums.

Missing out on a single payment can bring down a person’s credit score, and a poor score can result in loan applications being turned down. Even though it takes a long time to build a good score, a few missed payments here and there can water it all down. Additionally credit card companies can reduce the limit when the credit scores are poor. Financial institutions want to be certain that the applicant’s has a good payment record before they decide to lend funds.

Factors that can have a positive impact on credit scores

Some of the factors that can positively impact a person’s credit scores are:

  • Paying credit card bills on time
  • Properly utilizing the credit limit that has been approved
  • Not applying for a new credit card unless necessary
  • Making sure financial institutions submit payment details on time to the credit bureau
  • Review credit history on a regular basis to avoid surprises
  • Paying bills in full
  • Keeping balances low
  • Maintaining a healthy mix of credit  (80% in secured loan and 20% in unsecured loan)

It is important to note that holding a high credit score does not automatically mean that an applicant will get whatever he or she desires from the financial institutions. Lenders take other factors as well into consideration for approving or rejecting loans and other funds. The parameters differ from one institution to another. Some of these other factors could include debt to income ratio, income, employment situation etc.

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Understand the loan underwriting process

When you apply for a loan, as part of the process the information given by you is scrutinised and analysed in depth by the lender’s underwriting team before a decision is taken as to whether to approve or decline the said loan application.

What is loan underwriting?

Loan underwriting is the process wherein prior to taking a decision of whether to approve or decline a loan application, the lender (that is a bank or other financial institution) verifies the information provided by the applicant and confirms that the requirements as laid down by the lender for a particular loan facility are met.

Loan verification includes taking into account items such as employment or business history, salary or income and other financial statements, and the borrower’s credit history as detailed in the credit information report. Finally, it also takes into account the underwriter’s evaluation of the borrower’s credit needs and their intention as well ability to repay a loan they avail of.

The length of the underwriting process depends upon factors such as the completeness and complexity of the loan application received. It is also influenced by factors internal to the lender such as the underwriter’s experience as well as how busy the lender may be at the time. For example, if you apply for an education loan just before the start of a programme, it is likely that a lender already has their hands full with similar applications owing to the peak enrolment season and hence the time taken to process the application may increase.

What are the factors considered while underwriting loans?

Sound underwriting comprises of many aspects – judgement, experience and the underwriter’s ‘gut feeling’. This makes the process both subjective as well as objective. It is subjective to the extent that the underwriter forms an option about the borrower and their repayment capacity basis relevant opinions or impressions formed while reviewing the application. The objective view comes from understanding and analysing in depth the verifiable facts (such as income, other loan outstanding, past repayment track record) available before making the loan decision.

Let’s then take a quick look at the credit decision process.

Calculation of monthly expenditure: When a lender reviews your loan application they take into account the monthly outflow that you have, factoring in any obligations you may have, including monthly household expenses etc.

Existing debt repayment: When you have an existing loan the lender will take those into account as well, to determine whether it is possible for you to take on a further debt burden.

Monthly income: Not only is your cash outflow taken into account, but also what it is you earn each month, be it by way of a salary or a business income. This amount can also include any interest income (from investments such as fixed deposits) or rental income (from a property you are renting out), as it is an amount that occurs with regular frequency and can be relied upon when calculating the amount of debt you can undertake.

Debt to income ratio: What an underwriter does when assessing your loan application also includes determining just how much your current debt (or outstanding) is in comparison to your income. When your income holds its own against the outflow, the outcome is considered to be favourable and increases your chances of getting a loan. This is because you come across as someone who can handle debt well.

Review of credit profile: An important part of the process is scrutinising the applicant’s credit profile, i.e. pulling a copy of the credit report from a credit bureau to estimate the individual’s creditworthiness. This report is carefully scanned to check for loan defaults, skipped payments, account write-offs etc.

Keeping all the above factors in mind, the underwriter will review the applicant’s profile in entirety before making a decision either way. This in-depth analysis helps them to understand the risk involved in lending to a particular customer.

Loan underwriting and CIBIL scores

If your CIBIL score is good, the options available to you are a lot more, and most banks and financial institutions will be willing to lend you the loan amount you are looking for, whether to purchase a house or a car.

But do keep in mind that a credit score is one of the parameters that a lender uses while evaluating a loan application and is not the sole factor taken into account by any means. It is primarily a guideline and not used in isolation to other factors. If your credit score is low, it is not a given that a lender will reject your loan application outright; they are likely to weigh the other parameters as well, before taking a decision either way. Of course, the terms at which you may be offered the loan could likely be less competitive especially with regards to the interest rate than they would be otherwise, but a low score definitely is not the end of the road.

In conclusion

The loan underwriting process is a judgement call and underwriters are also human beings, willing to take a risk on those they believe will turn out to be ‘good’ borrowers! It is advised to check your CIBIL report before applying for the loan.

Need a new phone connection? Make sure you have a good CIBIL score!

Lenders such as banks and other financial institutions are not the only ones with access to CIBIL report, and are gaining acceptance as a means to perform a check on a consumer prior to extending services and offerings. These range from employers to insurance companies and telecom operators. CIBIL reports are sometimes used even for background verification purposes.

What a credit report speaks about you

Simply put, a credit report is a snapshot of your credit history – past repayment records, the type of loans (secured and/ or unsecured) you have availed of, the tenure of the accounts as well as the current outstanding on each of these accounts.

With this information, a lender or service provider can estimate the amount of credit they would want to extend to you, and at what terms and conditions.

A credit score is an integral part of the credit report. Typically ranging between 300 and 900, it is a numeric indictor of your credit history. Naturally, higher the score better are your chances for obtaining a fresh line of credit.

How telecom operators view the credit score

As per the Credit Information Companies Regulation Act (CICRA) 2005, telecom companies can make use of consumer credit reports prior to issuing a post-paid phone connection.  Conversely, as on date, telecom service providers in India do not submit or contribute any data to credit information companies or bureaus.  Also, this practice is currently restricted only to post-paid connections.

When they receive the report, like lending institutions, telecom companies also check whether the score is ‘good’ or ‘bad’. This helps them determine whether they would want to offer the connection or not, in the first place. With every new connection, as with loans, a physical or field verification of the consumer’s identity and address is undertaken. It is possible that with a healthy score, this requirement may be waived and hence the turn around time in providing the connection would be reduced, thereby making it convenient for the customer.

Once that has been established and the connection request granted, the same report and score are used to assign the credit limit that an operator is willing to set for the consumer. Of course, a higher score will translate into a higher credit limit. This is because a good score signifies that the customer is reliable and has a good repayment record when it comes to honouring credit. For example, say your credit limit is set to Rs. 5,000 by the operator and halfway through your billing cycle the amount outstanding is Rs. 7,500. At this stage, without making an interim payment, there may be temporary restrictions on the services available to you. Once the amount is below the credit limit upon payment, the balance can be paid in the next billing cycle.

Further, a telecom company also decides on the security deposit a person may need to pay for a new connection. A good credit history could mean that the amount required by way of the deposit would be lower than for someone with a poor or bad score.

What you should do

With the entrance of telecom companies and other financial service providers such as insurance companies increasingly making use of credit scores, it may not be long before most financial transactions require an individual to have a good credit score.

In some countries the world over, telecom operators do not offer post-paid connections to those users with no prior credit history. This practice may hit Indian shores going forward, therefore establishing a sound credit history gains importance.

Hence it becomes critical to not only know your score, but take measures to improve your credit score if it is not satisfactory. A consistent payment record that ensures no late payment or defaults will help in improving the score.  At regular intervals, therefore, it would be a good practice to check your credit score and make it work for you.

How often should you check your credit score?

One may not need the credit or loans at all times, but it is prudent to keep track of your credit score regularly. If you find anything out of the ordinary, it would be wise to report it to the concerned lender immediately, and have it rectified.

As a consumer, you should be aware of your credit history, as any small error can play havoc with your score. Make sure that the information captured in your report is accurate and up-to-date, ideally checking at least once a year.

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When should you check your credit score?

There are four credit bureaus in India licensed to operate by the RBI. You can apply for a report to any (or all) of the bureaus, and check the scores across each.

A good strategy is to spread out your report requests throughout the year, instead of getting them from each bureau at the same time. That way, you would be able to keep track of your score year-round.

You may want to check your report additionally if you are planning to avail of a new line of credit – a loan or a credit card – as the score plays a critical role in the approval process. A good score can ensure you get a loan on the best possible interest rates and terms.

Alternately, it would suffice to request for a report from the bureau once a year. Checking your personal credit history as often as you like does not impact your score.

How to get a free credit score?

While the bureaus themselves do not offer a free credit report to consumers, you can log on to freescoreindia.com, for a free credit score from Equifax, one of the bureaus in the country today.

To summarise, while a free credit report is not available currently, spending a relatively modest sum to know that your financial information is correct is well worth it. Know your credit score and earn yourself some well-deserved peace of mind.

How to do a credit check

The term ‘credit’ is synonymous for ‘loans’. A loan is a borrowed sum of money from a bank or a lending institution to fulfill financial goals and meet monetary needs. A credit card is also a type of loan. Usage of loans and credit cards is recorded on a database by banks and credit bureaus, in the form of credit report. A loan applicant may seek their own credit report, or a bank may do a credit score check for a loan application received to assess loan eligibility. This process is known as credit check and involves checking one’s credit report and credit scores.

Online and offline modes for doing a credit check

A credit check can be done via online and offline modes from any one of the four bureaus operational in India, viz CIBIL, Experian, Equifax or Highmark. These bureaus charge a nominal fee to generate credit reports of a loan user. Online mode is usually preferred, because it is paperless, convenient and faster. For the online mode, one must visit the website of the bureau of one’s choice and fill up the details asked under different tabs. There will be a list of documents given, that will indicate proof of identity and proof of residence – one must collect these and upload them online. Thereafter, move along with the instructions given on the web portal, and follow them; close the application by making an online payment for the charges asked by the bureau. The charges for drawing one’s credit report can range from INR 300 to INR 500, depending on the bureau you approach.

The bureaus also list their helpline numbers and email id for assistance in processing your credit score application. Once you close your online process, the bureau will generate your credit report and send a soft copy of the same via electronic mail only to the email id registered by the applicant. For those who are not savvy on the internet and for those who do not have an email id, the bureau will send a hard copy of the credit report to the applicant’s registered residence address.

Freescoreindia.com gives free credit score. The process here is more or less the same, as for a paid report.