BT Insight: Why you must care about Credit Score?

Burden of paying EMIs when you have suffered a job loss or a salary cut is too heavy to shoulder, in most cases putting you into a debt spiral. If it has happened with you, troubles may hit the roof if you are not careful about your credit score

KEY HIGHLIGHTS

Review your credit score frequently as you live through COVID-19 crisis
With higher digital transactions, you must ensure correct data is being reported
It is your responsibility to fix errors if wrong data has been sent to credit bureaus
You can avail one free credit report each year from each credit bureau
Additional reports cost at least Rs 100 or more
Banks and third party platforms can also help you access reports
Besides loans, credit score is used for employee screening and identity protection
Once dinged, improving your credit score takes a long time

The millennial generation known for instant gratification even if on credit learned some important personal finance lessons as the coronavirus crisis unfolded. The burden of paying EMIs when you have suffered a job loss or a salary cut is too heavy to shoulder, in most cases putting you into a debt spiral. If it has happened with you, your troubles may hit the roof if you are not careful about your credit score. While generally you may not have been in the habit of checking your credit score frequently, you must be proactive about it now as you live through the crisis.

"It is extremely critical to take stock of your financial outflows in the current situation. If you have opted for loan moratorium, you must know it is a deferral, not a waiver. Plan your repayments now lest it impacts your credit score after the moratorium ends. It has become more important than ever to check your credit score regularly. With lot of digital transactions happening, you need to ensure that right kind of data is being reported so that you are on top of your finances and ready to avail credit in future," says Sujata Ahlawat, VP and Head of Direct-to-Consumer Interactive, TransUnion CIBIL.

We tell you all about credit score and the need to maintain it:

What is a credit Score

A credit score is a three-digit number that shows your ability to repay the loan based on your credit behavior including loan repayment history. Your bank shares your credit details along with your personal information with credit bureaus, which maintain a credit report for each borrower. There are four RBI-licensed credit bureaus in India -- TransUnion CIBIL, Equifax, Experian and CRIF High Mark. Although their credit scoring differs from each other, you need to follow similar parameters to maintain a high score.

According to Adhil Shetty, CEO, BankBazaar.com, these parameters include timely and full repayment, low credit utilisation ratio, long age of credit lines, and the number of credit accounts opened. "Broadly speaking, a score of over 750 should help you get some of the best loan and credit card offers from most banks and lending institutions. However, the use of credit score as a tool for risk grading differs from one lender to another," Shetty says.

RBI moratorium and your credit score

Although the Reserve Bank of India has specified that opting for the EMI moratorium will not affect your credit score, you should still check if it has happened or not. "If customers have availed moratorium, as the first step they can check their credit report to verify that the moratorium availed has been reported correctly by banks or NBFCs. If it has not been reported correctly, they can contact the lenders and raise a request to correct the error," says Navin Chandani, MD & CEO, CRIF High Mark.

How to check your credit score

The RBI has specified that each credit bureau is obligated to provide one free credit report to each customer who ask for it, after which you need to pay some amount. The charges differ from one bureau to other. For example, CRIF High Mark charges Rs 399, while Equifax Rs 100. TransUnion CIBIL has monthly, half-yearly and yearly subscription service of Rs 550, Rs 800 and Rs 1200, respectively. "It gives you access to entire credit dashboard where you can log in regularly. Every time there is a change in your score, CIBIL alerts intimate you about it," says Ahlawat of TransUnion CIBIL. There are third party platforms such as CRED, Bank Bazaar and PaisaBazaar etc that provide free credit reports. You can also avail it via netbanking also if your bank has a tie-up with credit bureaus for the purpose.

Why do you need a credit score

There could be debt averse consumers who have no plans to take loan in future. They are fine with not having a credit score. However, credit score is not just about availing loan. Its scope has widened. "The way industry is moving and everything is getting digitised, credit profile has become much more than just availing a loan. CIBIL score is used for multiple other factors such as for employment screening and identity theft protection. So, if you don't have a credit profile, it's prudent to build one," says Ahlawat of TransUnion Cibil.

Building a credit profile doesn't mean that you have to take big ticket loans. You can have a credit card that you may use for small purchases. "It doesn't have to be a specific loan type. Availing a short quick consumer durable loan (buying a mobile, laptop etc) is also one of the ways to start building credit history and score," says Chandani of CRIF High Mark.

How often to check your score

You need to check your score regularly because each month your banks submit your credit info to bureaus. "Credit score can change at the minimum on monthly basis if no other credit related activity is done by the borrower during the month. So, it is advisable to check credit score every one to three months," says Manu Sehgal, Business Development leader, Emerging Market, Equifax. Does frequent monitoring ding your credit score? No it doesn't since these are considered soft enquiries which don't pull down your credit score.

How to maintain a good score

It is obvious that you must pay back all your dues in time to maintain a good score. The higher your credit score, the cheaper interest rate you will receive on loans. But, you should avoid making loan applications quite frequently, especially when one bank has rejected it. "Do not hasten to re-apply with another bank as they would be able to see your rejection by the previous bank. This could further hurt your credit score and make things worse," says Chandani of CRIF High Mark.

If you use a credit card, get into the habit of paying full outstanding instead of minimum dues. Although it doesn't impact your credit score, it makes you prone to overutilising your credit limit. That indeed hurts your score. "If the borrower is paying only minimum due amount, it is possible that the borrower is utilising high percentage of credit limit sanctioned to him and that can have impact on the credit score," explains Sehgal of Equifax.

How to improve a bad score

You never want to hurt your credit score because improving it is a long and tedious process. The common myth is that a bad credit score can be immediately improved once all the overdue/default payments are made. But this is not how it works. "The credit score takes into account many years of historical data and once deteriorated, it will take some time to improve when the recent positive behavior outweighs the past negative behaviour," says Sehgal.

Source: Publication: Businesstoday |20 th June 2020