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It helps to borrow...

...Because it builds your credit history. However, be careful not to go overboard

Priya Nair 

(name changed), an information technology professional, recently got an Since his credit score is around 770, he can easily get a or another credit card if he applies for it. Yet, if he does, he might also be labelled 'credit hungry', bringing down his score.

Is his fear justified? Yes. Making many enquiries about or credit cards can affect your score.

"When you apply for a loan, you submit your documents (salary statement, tax returns, etc) to a direct selling agent (DSA). Who, in turn, might use the same information to apply for a in multiple banks, promising you better rates. This will show up as enquiries made by you. This will impact your credit score," says Rajiv Raj, co-founder of CreditVidya, a credit counselling services firm.

Past experience has made Kumar cautious. Initially, he had a credit card with a limit of Rs 25,000 and two of Rs 50,000 and Rs 1.5 lakh. He began defaulting on these. After a while, his applications for new credit cards and started getting rejected. This is when he realised his credit report had 'derogatory' remarks. The moment Kumar settled both loans, his score improved from 537 to 640. Fortunately, he had a third personal loan, which he was servicing regularly. He also cleared the credit card dues entirely. He then got a credit builder credit card, which is a card linked to a fixed deposit. This helped improve his credit score to 770.

"It took me two years to increase my score from 537 to 640 and then to 770. Credit score cannot be built merely by paying off your dues in one or two months. It takes time," he says. Let us see how to build a high credit score and its benefits.

Multiple cards
Will having only one credit card and paying off the entire amount every month ensure a high credit score? Not necessarily. "It is different when one has a credit card with maximum utilisation and when one has two credit cards with the same credit limit amount but utilise only 50 per cent. Despite the fact that the single credit card is repaid every month, the behaviour is more risky. It can be interpreted that the client is not able to fulfill his consumption with his current income," says Kalpana Pandey, managing director,

Assume A has one credit card, with a credit limit of Rs 1 lakh and a balance of Rs 50,000. Against this, B has five cards, each with a limit of Rs 1 lakh and a balance of Rs 10,000. The credit utilisation ratio (the ratio of the balance to the credit limit) in the case of A is 50 per cent; for B, it is 10 per cent. So, B will have a higher credit score than A. In other words, the ratio of utilisation over a consistent period of time is more important than the number of cards held by the customer.

Gaurav Wadhwani, director, Credit Sudhaar, another credit counselling services firm, says: "Many people tend to use one card to the full in order to accumulate points. But, this might stretch the credit utilisation to 80-90 per cent on one card. Instead, if you can split that over three cards, this will improve your credit score."

Closing old credit cards
Since it is not advisable to have too many credit cards, how to choose which to keep? According to Raj of CreditVidya, it is better to close the recent ones than the older ones. "One parameter that credit bureaus look at while giving scores is the vintage of credit or how long you have been using the card. So, if have an older card, on which you are revolving credit or have a balance, it is better to retain that one rather than the new card," he says.

No card, loan
Being completely debt-free will also not ensure a high score. It might actually result in the bureaus not having enough or any information about you to be able to generate a credit score, says Mohan Jayaraman, managing director, Experian Credit Information Company of India.

Lately, most credit bureaus have introduced a 'new to credit' score for customers, with no footprint on the bureau. This score is usually a ranking basis from the performance of statistically similar customers.

"There is no ideal level of debt and consumers would be well placed to leverage on the basis of their requirements and repayment capability. A credit card record with regular repayment of full dues might be a good way for a debt-averse customer to build a credit track record," says Jayaraman.

An individual who does not have any credit history, might face more scrutiny by the financier before the is approved, says Pandey.

Type, amount of loan
Having a high loan does not automatically bring your score down. "It is possible to achieve a high score with any amount, even with a high amount. Rather than the disbursed or sanctioned amount of the past, the current dues are more important," says Pandey.

For example, a client with a very high disbursed amount, whose current dues are 10 per cent of the original disbursement, can secure very high score points. Provided also that other characteristics should indicate low risk, such as no delinquency in the recent past, sufficient amount of payment behavior experience, etc.

As a rule, consumers with only unsecured credit are riskier than those with secured credit. This is because secured credit is backed by collateral like a house, a fixed deposit, shares, etc, unlike unsecured credit. On the other hand, consumers who default on a secured loan are more risky than those who default on unsecured credit, says Nimilita Chatterjee, senior vice-president at Equifax India.

Benefits
"Nobody wants to lose a good customer. A high credit score ensures you will get the best rates from banks," says Wadhwani of

Borrowers can expect up to 25 basis points lower rates on loans if they have good credit scores, adds Raj. Faster approval for loans is an added benefit.

Get better loan rates with good credit history
Past is an important factor while sanctioning a loan, along with other measures to evaluate borrowers' risk, says Arjun Chowdhry, head, credit cards and unsecured lending, Citi India.

What are the benefits of having a good and high credit score?

A good is essential, today, to avail of any consumer credit facility. Increasingly, lenders are offering flexible and innovative credit options to meet the changing needs of consumers. A clean score helps consumers get access to credit and avail of a greater choice of lenders. It also helps in getting differential pricing, based on risk assessments, of which credit history forms a large part. For example, at Citibank, we offer differentiated pricing for consumer credit payment products, based on risk assessment, including factors such as credit history and internal factors.

What is considered a high credit score? Is there a cut-off score, below which the bank will not approve a loan?

Credit bureaus and financial institutions globally develop their proprietary scores on various parameters, such as repayment history and credit demand, among others. The definition of a high credit score varies among lenders, depending on their respective risk underwriting strategies. A customer's credit score and debt repayment capacity play a critical role in any lender's decision to extend credit. Yes, lenders do adopt different credit score strategies for different credit payment products. For example, the credit score requirement for a secured product might be different from that for an unsecured loan.

How much weightage is given to credit history and score before sanctioning loans? In the absence of a credit history and score, what factors do you take into consideration?

While the borrower's past credit history is an important factor while evaluating any loan or extension of credit, the absence of a credit score, by itself, does not necessarily restrict a borrower from availing credit. Lenders exercise their own discretion in evaluating other factors, even in the absence of a credit history or score, such as income, existing relationships, demographic details and others.

How can borrowers build a good credit history and score?

A good credit score is a function of sustained and regular repayment history. Borrowers who might have faced challenges in adhering to the repayment schedule should pro-actively get their credit scores evaluated and ensure they correct the repayment pattern, to ensure they can build back their score.

Today, we are also seeing the beginnings of specialised service providers who can consult with and assist people with low scores, to help them build back a score, and improve their chances of availing credit.

First Published: Mon, June 29 2015. 00:08 IST
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