Fundamentals of credit score

What is a credit score?

Credit Information Bureau India Limited (CIBIL) is a Credit Information Company or a Credit Bureau. Maintenance of records of all the credit-related actions of businesses and individuals including loans and credit cards are carried out by this company. The registered banks that are members and various other financial institutions periodically submit their data ahead. Based on the record and information provided by these institutions, CREDIT issues a credit score as well as a Credit Information Report (CIR). Basically, it is just a database for credit information and does participate in any kind of lending decisions.

Why is your credit score low?

A poor credit score can put you in immense trouble, more than you can ever imagine. You might also feel that you are doing everything to keep your credit score high, but one fine day, just while checking your score, you realize that it is lower than envisioned. It is very dangerous to have a low credit score because this world has become completely credit dominated and how you service your credit or your credit behavior has assumed immense importance. There might be many reasons for your low credit score, some of which are mentioned below in detail:

Why is your credit score low
  1. High credit utilization ratio: It is crucial to become a responsible borrower and manage credit in an accountable and consistent way. Only 15-30% of your credit card limit should be used ideally. If you are using your credit card limit to the maximum extent, it suggests you are not able to handle your finances and are credit hungry in nature. Always exceeding the limit of your credit card and having a high credit utilization ratio can affect your credit score in a negative manner.
  2. Payment history: By only paying the minimum amount due on your credit or paying the interest payment after the due date is gone, your credit score falls immediately. Consumers who default on their EMIs or make late payments, earn a bad credit which in turn, negatively impacts their credit score. Your credit score is bound to go down by defaulting regularly.
  3. Not having a credit mix: The credit combination in your financial history should be a good mix of unsecured and secured loans. If this mix is not proper, the credit score is impacted unpleasantly because of the unbalanced assortment of unsecured and secured loans, thus, giving you a bad credit history. Secured loans are ones with a collateral kept of the borrower while in unsecured loans, there is no collateral, and is given only on the credit-worthiness of the debtor.
  4. Administrative error: If you do not check your report properly, you should because many times there are errors in them that are responsible for your low credit score without any fault from your side. Slip-ups are pretty common here as both the credit bureaus and the banks have to handle large amounts of data at this juncture. This might be the result of a fraudulent activity too. It is your duty to inspect your report very judiciously for errors and raise a dispute immediately as you come across any fault. It might take a week to a month for rectification depending on the nature of the dispute.

What is a good credit score?

Any score between 700 and 900 comes under a good credit score. Having a good score gives you some amazing benefits such as low-interest rates on credit facilities, quicker approval, longer repayment period, higher loan amount, and more. Moreover, numerous lenders will be eager to approve your loan so you even have an upper hand on making a selection about the lender you wish to borrow money from. A good credit score guarantees a greater chance for your loan application to get approved. It does not matter if it is a car loan, home loan, or a personal loan, a score above 700 is favorable in all cases. With a good credit score, one can get amazing deals with a longer repayment period, higher loan amount, lower interest rate, and also an easier documentation process. Even in getting a home loan, if your score is between 700 and 900, you can get up to 80% of the total cost of your property. Though, in case of a personal loan, such a standard cannot be set up because it is an unsecured loan. Here, the loan amount varies depending on the loan purpose and the score. In the instance of a car loan, there is no particular score that will qualify you. It is suggested to have a score above 700 for staying confident while applying for a car loan. A higher score represents better credit decision-making and creditors also feel more confident about you repaying your future debts as agreed on time. A good credit score is a proof to the lender that the credit holder is a responsible person and they want to extend credit to him in the future as well. 

How can the credit score be improved?

There are many ways to improve your credit score, some of which are mentioned below:

How can the credit score be improved
  1. Pay dues in full: While the bills are generated, many people fall prey to the teaser of minimum due offered by the credit card companies. In a specific billing cycle, this minimum due is calculated at about 5% of the total outstanding balance. It is possible to escape the late payment charges as you pay up the minimum due, however, the taxes and interest add up to the next bill. At the same time, by just paying the minimum due, your credit score goes down considerably. That is why it is advised to pay the credit card dues entirely to prevent taxes and interests added up to your bill. Performing timely payments and recompensing the entire due regularly will make the credit score rise gradually.
  2. Keep the oldest credit card account: Well, if you believe that the credit card account that you’re not using currently should be closed, then you’re completely wrong. The effects and impact that this closure has on our credit score and report is enormous. The credit card account should be well managed and timely payments should be made. This builds up a very good image in the report and gives the required longevity to your credit score. Lenders consider this score during the evaluation of your application. This good account should be kept as long as you can and should not be closed as you have a solid repayment history here.
  3. Increase the credit limit: It does not compulsorily mean that you receive a chance to spend beyond your means when you ask your bank for raising your credit limit. If you have managed your credit wisely, you can get a number of plus points with this hike. This refers to the situation that you have a higher credit available at your disposal, and if your credit utilization is less, your credit score will be positively impacted. That being said, please confirm you don’t spend beyond your repayment capacity.
  4. Pay EMIs on time: The EMIs and the credit card bills should be paid on time. If you are thinking of purchasing something big like a home or a car, all these details really matter. You should not be behind in paying these bills. This is one of the significant things that credit looks into while evaluating your credit rate. Even if you have a huge amount of savings, a drop in the credit score can smash your dreams of owning a house or a car. Timely payment of bills can keep your solvency intact. Late payments are not appreciated and are viewed negatively by the lenders.
  5. Eradicate the balances: Is there a huge credit card bill waiting to be paid off? Is this the reason for your default? It is better than that you opt for a personal loan for paying off your card dues. The interest rates that come along with a personal loan are 11%-25% as compared to the interest rates of credit cards which is about 30% to 40%. By doing this, your card balance is paid off fully and immediately. Now, this personal loan taken can be paid off through easy EMIs and the calculation is also done at a lower interest rate. This will help you to raise your credit score and also repay comfortably at the same time.
  6. Don’t do debt settlement: Credit cardholders usually get scared after looking at the mounting debt. They try to reduce it by signing the agreement of debt settlement with the lender. Undoubtedly, this scheme will cut down the size of the debt. But while doing so, it will show your inability to repay the liability, thus, shutting down the door for any fresh credit applications and affecting your credit score simultaneously. For maintaining good credit health, just avoid debt settlements at all costs. Many fresh loan applications can reject you if you have settled your debt. This can be dealt with by setting up a fixed deposit as a collateral for getting a card or loan. The credit limit or the quantum of loan available will be provided at a certain percentage for about 80% to 90% of the amount of FD. Even in such a case, timely payment is essential for raising your score.
  7. Avoid withdrawing cash from ATMs: There are many credit cards offering the option of cash advance limits. Don’t fall into the prey. If you have used this, pay up the outstanding bills instantly. Don’t think twice for touching your recurring deposit, savings surplus of fixed deposit, mutual funds or any such financial instrument for this purpose. The major problem with withdrawal of cash from the credit card is that the interest starts accruing immediately from the point of occurrence, contrasting to the retail purchase where the cardholder is granted 20-50 days interest-free credit period. Cash advances lead to a faster rise in bills and the score goes down instantaneously. Hence, it is a fundamental error in which one can commit at one’s own risk.
  8. Timely payments: Well, all those shopaholics bounce with joy as they get to know the perks of having a credit card. They can shop anything from anywhere at any point of time, this convenience offered by the credit cards to the credit card holder is a trap that most people fall into. People are having impulsive buying tendencies as they swipe their credit cards every now and then everywhere. The best thing one can do for credit cards is not to come too close to the credit card limit. One should also exercise paying back the entire amount on time or at least a sizable amount and not just the minimum amount due. Many times, because of some imprudent expenses, the amount of the bills becomes higher than the ability of the person to disburse it. One should avoid these unwise decisions of delaying or defaulting the payment of this irresponsible spending. Such an act reduces your credit score and also adds up taxes to the bill and the late payment charges. Therefore, the bill amount can be very high to pay on time now and there could possibly be a further dip in your credit score. Such impulsive spends must be restricted so that the bills don’t rise beyond a specific point. One thing that could be done is to stop spending on the card for at least three to four months in a row so that the increase in card bills is stemmed. While doing this, a lid should be kept on the other expenses too, so that a pool of savings could be created for paying bills on a timely basis. As this practice is carried on continuously, your score is raised in a few months of time.
  9. Cut down on dining and other expenses: There are numerous discount offers proposed by various companies these days for dining, movies, etc. These bargains can tempt you for eating outside frequently even if you don’t want to go. The bills that arrive can be beyond your comfort level in many cases. Many other requirements are also fulfilled by using credit cards. However, when your bill arrives at your mailbox, you can see both the minimum due and the total dues, with the former getting calculated at about 5% of the latter. Paying up the minimum due is an attractive offer for the cardholder as it seems easy to pay back a smaller amount to the lender. But once you do that, you are immediately hoodwinked by the credit company as your credit score falls because the credit keeps on revolving around. Always remember your spending limit for staying out of this debt trap. In this way, you can save up the money for paying your card dues fully. This will eventually raise your credit score.

For any queries regarding Credit Score improvement or Loan contact Credit Bazaar CR Arcade 2nd Floor, Opposite Delta Garden, Next to Shree Mahalaxmi Restaurant, Mira Road East, Thane : 401107

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