No credit rating for retail borrowers: Here's what you can do to cash in

Constantly trying to better your credit score is the only way to get better borrowing capacity

The standard procedure to obtain a retail loan from banks involves obtaining a credit score, which helps banks decide whether or not to approve a loan proposal. While this score may be very important, it is not the only factor in deciding the interest rate at which you will receive the loan. 

In India, the interest rate levied on corporate customers is based on their credit rating. Higher the rating, lower the interest rate is the model that applies in this case.  However, in case of retail borrowers, banks do not lend based on credit rating, but only on the basis of a credit score, The Economic Times reports. A credit score is a number ranging between 300 and 800, which shows your credit-worthiness. While calculating the interest rate, banks claim, many factors apart from just the credit score like mortgages, relationship with bank, employer's record etc. are considered while deciding this score.  

As a result of this process, a retail lender with a higher credit score cannot avail the benefit of a lower interest rate. In fact, there can be times when two people with distinctly different scores can end up with a similar interest rate. However, his/her chances of availing a loan goes up against people with lower credit scores.

So, how does one play around in such a situation? Experts have always emphasised on improving your credit score. 

Business Standard lists out a few ways to help build a good score and increase borrowing capacity.  

Timely payment

Making your payments on time will help you improve this score. The payment history constitutes almost 35% of the total for calculating this figure, this report states. 

However, an important case in point is that this score will improve gradually and not drastically at one go. So, suddenly paying off all your debts will not improve this score at one go. 

Credit limit usage
 

It is advisable to use the credit limits judiciously. Experts say that it is advisable not to exceed beyond a certain threshold in terms of credit card spending.  “Don't use the credit limit up to the hilt. Generally, it is advisable not to exceed 40% of the limit," Arun Ramamurthy, co-founder, Credit Sudhaar, a company that helps people improve their credit score, had told Business Standard earlier.

Periodic review of scores
 

Your work does not end at just getting the credit information and score. It is important that you go through it to know which are your weaknesses and rectify errors, if there are any. 

Mix it up

It is advised to have a mix of both secured and unsecured loans in your portfolio. Relying only on unsecured loans, like credit cards etc. will not help with your score. It is advised to avail secured loans like a housing loan to better this score. “Suppose a person has a credit card and no other type of credit. He might be paying his dues on time, but chances are that his credit score might not be very good. This is because the credit bureaus do not have adequate data on different types of credit to be able to score that person properly," adds Ramamurthy.

Closing unused accounts

It is important to close all accounts that are no longer in use. Lenders take into consideration credit limits available to you as well. “To maximise the eligibility on a home loan, reduce overall exposure to other loans," Kalpana Pandey, MD, CRIF High Mark told Business Standard earlier.