Tania Kishore Jaleel & Sunita AbrahamSunita Abraham | Last Modified: Mon, Feb 01 2016. 01 46 AM IST | LiveMint.com
Understand and manage your credit behaviour to protect yourself from a low credit score
You know by now that big brother is watching your credit behaviour. One misstep in how you meet your financial obligations and your credit score will feel the effects for a long time. The credit score is a number based on your credit report—which is a summary of your past and current borrowings and your repayment history—that a credit bureau agency prepares. Currently, there are four such companies in India—Credit Information Bureau (India) Ltd (Cibil), Equifax Credit Information Services Pvt. Ltd, Experian Credit Information Co. of India Pvt. Ltd and CRIF High Mark Credit Information Services Pvt. Ltd.
A good score will help you get credit and loan facilities easily and on better terms, while a bad score will harm your borrowing interests. However, it is easy to make errors and have oversights that pull the score down.
“There are specific elements from one’s credit report that shape the scores; these are called credit score factors. These include amounts owed by a borrower, type of credit in use or the total number of credit accounts maintained, appetite for credit through credit inquiries and the number of late payments,” said Mohan Jayaraman, managing director, Experian Credit Information, and country manager, Experian India. It is important to understand and evaluate these factors, since an increase in these could result in one’s credit score being lowered.
It is good to know what may harm you if you want to protect yourself from the ills of a low credit score. Here’s what you can do about it.
Validate credit report
Check your credit report at frequent intervals to make sure that there are no errors or mistakes in the data, which may, in turn, be affecting your credit score. For example, there may be errors in your personal information. The balances reported on the loans and credit cards may be incorrect or may not reflect the repayments you have made. All of these have the potential to needlessly pull down your credit score.
To avoid that you just need to periodically purchase your credit report for a nominal sum, and if there is any disputed information, you should give an application for correcting it. The cost will vary across credit information companies. For instance, Experian charges Rs.399 for a credit score and Rs.138 for your credit report. Cibil charges Rs.500 for your credit score.
The credit bureau will make the changes after the credit institution confirms the error and provides the correct information. “It is recommended that one checks her score and report once a year. This is because it is good to know where you stand and also if there are any discrepancies,” said Aparna Ramachandra, founder director, http://www.rectifycredit.com, a credit repair and advocacy firm.
Delay or default
Delaying or defaulting on making loan payments and other obligations reflect poorly on your score. While even a one off case of delay or default will have an effect, frequent delays or defaults will indicate financial difficulties or lack of discipline and an inability to meet repayment obligations. Have systems in place, such as automated payments, to make sure that you don’t inadvertently miss a payment, if funds are not an issue.
Use credit in moderation
Just because you have been approved a high credit limit on your credit card or some other type of a loan doesn’t mean you take on the offer. Using a high percentage of the credit facility that you have been sanctioned, or a high credit utilisation ratio, may indicate a lack of control over spending habits and the risk of not being able to service the debt.
“Taking too many loans may be depicted as being credit hungry while applying for no loans means that a borrower will have no credit footprint on the bureau. Neither of these scenarios augur well for someone who plans on taking a loan,” said Jayaraman.
“Credit information companies consider consumers who apply for several new credit lines in a short period of time to be at a higher risk and hence adjust their credit scores accordingly,” he added.
Closing a line of credit, such as a credit card or an overdraft facility, while a financially prudent step, may also push up the credit utilisation ratio now that the available credit has gone down without an equivalent reduction in credit usage. Consider the impact of any credit related decisions, like applying for more credit, closing credit lines, or increasing usage.
“Taking too much credit, especially if it is unsecured credit, has a higher negative impact on the credit score. Lenders always look at debt in relation to the income for a more balanced view,” said Kalpana Pandey, chief executive officer and managing director, CRIF High Mark Credit Information.
Go slow on new enquiries
Each time you apply to use a credit facility, the credit institution will access your earlier information and this is recorded as an enquiry in your records. Too many enquiries reflect negatively on your credit score. “Space out your credit applications and limit making several applications close together as lenders may see this as a sign of financial stress,” said Pandey. It also indicates an inability to live within the available income and lenders may view this as a risk to your ability to meet repayment obligations.
Ramachandra said that a particularly big red flag in the eyes of a lender is if one makes regular enquiries about a particular type of credit. “This shows that you cannot live within your means,” she said.
Build a credit history
While a clean slate may be good news for your overall financial situation, it can hinder your ability to get a loan or credit facility in the future. Some lenders may look for evidence of responsible repayment behaviour before they lend, and not having a credit history works against the borrower in such cases.
Similarly, if you are considering reducing the number of credit cards that you hold, then retain the older credit cards in which you have a disciplined payment history, and close the newer ones. This will strengthen your credit score.
Monitor guarantees and add-ons
Standing guarantee for a loan, and holding and giving add-on cards may seem harmless but they can have an impact on your credit score. If the primary borrower defaults on the payment obligation, then as a guarantor it will be your responsibility. Similarly, whether you have given an add-on card or hold one, a default will reflect on both parties’ credit reports. Regularly monitor these obligations to make sure that there is no default. Else, you could be penalised for no fault of yours.
Since it’s difficult to avoid credit or loans, protecting the credit score should be a priority. “The most important factor to improve a credit score is to clear all outstanding credit card dues and then start paying back outstandings on your loan regularly (month on month). Once a borrower pays all her outstanding instalments and has started paying regularly, her score will improve,” said Jayaraman.
Close unused credit accounts if you no longer need them. Lenders take into account the credit limits available to you, and not just what you currently owe.
Have an emergency fund in place so that loan repayment obligations are not affected if there is a fall in income. It will also help pay for expenses such as medical situations, which may otherwise push you into additional debt.
To improve financial discipline, take simple steps like automating debt and bill payments, keeping contact details updated so that there is no missed information, periodically checking credit report and signing up for intimation by SMS or email for payment obligations.
The consequences of a poor credit score may not be immediate but it is an expensive mistake that you will pay for a long time. It will also take a long time to repair.
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