Poor credit history is a common problem that can destabilise your finances. It may happen during the early employment days when individuals borrow to buy vehicles or take personal loans to meet their rising credit card bills. Equally susceptible are mature families who borrow to fund the higher education of their children or any other incidental needs.
This credit data is submitted by lenders to credit reporting agencies like CIBIL (Credit Information Bureau (India) Limited) on a regular basis. An individual’s credit score provides a credit institution with an indication of the probability of default. These scores play a critical role in the loan approval process.
In countries like UK, it is observed that negative entries about credit history stay on an individual’s file for as long as six years. However, it is important to set one’s credit history straight and getting out of debt helps in a major way for this.
If you are faced with such a problem, start with the basics. That is, obtain a credit report. Currently, there are four CICs notified namely Credit Information Bureau (India) Ltd, Equifax Credit Information Services , Experian Credit Information Company of India and Highmark Credit Information Services . The procedure to obtain this report is very simple by payment of a nominal fee and the report is presented in easy to understand format.
On receipt of the report, it is important to highlight the areas that need to be addressed. At the same time, it should be reviewed for inaccuracies or any entries that may not belong to the individual. The personal information and the account information provided have to be carefully scrutinised for any blatant errors in reporting. It is essential to understand the different sections of the credit report in order to determine the next step to improve the score. There are 3 main sections that should be known.
The score ranges from 300 to 900. The closer the score is to 900, the more favourably is the loan application viewed by a credit institution. The scores for an individual may vary across different CICs as each company operates independently. Individuals looking to improve upon their scores should keep in mind some important tip
Avoid late payments or defaults
Late payments or missing payments on existing loans / credit cards should be avoided as regular payments helps reduce the impact of defaults in the past. A regular payment cycle way-forward will help indicating no troubles in servicing existing obligations, which will help impact the credit score in a positive way.
Keeping credit limits low
Most credit card companies lure people to pay only the ‘minimum amount due’ on their cards, but this can be dangerous for credit scores. While an increased spending on credit cards do not necessarily affect credit scores, a higher increase in outstanding balance on cards indicates increased repayment burden and has the potential to negatively impact the score. So, being prudent on utilising credit limits will be helpful.
Higher number of credit cards and personal loans
It is easy to give in to the ‘free for life’ credit card over the phone.
But, a high number of cards or even personal loans, being unsecured, indicate high utilisation of unsecured loans which is not very helpful for a better score. At the same time, higher number of home loans or auto loans is favourable as the same are considered as secured loans.
Making applications for multiple loans at the same time indicates a “credit hungry” behaviour, which can impact your credit scores. This behaviour is perceived to not only indicate an increasing or likely to increase debt burden but also the incapability to honour the same and thus the new credit facilities.
Globally, various non-financial aspects are also perceived to be pro good credit scores. For instance, retaining the same residential address for periods more than 3 years helps in improving the score. Again, continuing with the same job for more than 3 years adds credibility to the score. Even maintaining the same bank account for a long period of time is counted.
It is pertinent to record and review your credit scores over regular intervals. If any difficulty is perceived in understanding credit reports or maintaining the debt discipline, professional help should be taken for the same. For individuals with high levels of debt, a stringent review of monthly budgets may allow paying off some existing debts. Maintaining discipline with repayment dates, amounts and commitments will all help in the cause for a good score. All (or any) of the tips given above will only help in dramatic improvement of your scores over time.
The writer is a certified financial planner