How To Achieve A Good Credit Score? - Navin Chandani

Credit sentiment, or the perception towards purchasing things on credit, is slowly evolving in India. The traditional habit of Indians buying things with ready or available money is changing and many individuals are now opting for credit-led choices to meet their day-to-day expenses made via the use of credit cards, small-ticket loans as well as longer-term loans.When sanctioning a loan or any credit product, the lender will evaluate the consumers’ credit score. Here’s what you need to know about what a credit score is and why you should maintain a good credit score.

What Is Credit Score?
A credit score is a three-digit number ranging from 300 to 900 wherein 300 is the lowest and 900 is the highest or the best score. The score indicates a person’s creditworthiness and lenders use it for decision-making while sanctioning loans or credit cards. The score also reflects the borrower’s financial credibility and likelihood to default. A person with a low credit score will be considered at a greater risk of defaulting. This means that the lender will either reject a loan request or grant a loan on a higher interest rate.
Currently, there are four credit bureaus in India providing credit scores for individuals and businesses. They offer credit scores by assessing a number of parameters such as outstanding debts, repayment history, loan tenures, credit mix, ratio of debt to income, etc. Therefore, it is critical to be aware of how to manage credit and shape your credit history.

How To Know Your Credit Score?
Finding your credit score is easy. The credit report from all of the four credit bureaus is free, once every year. It is a quick and simple step and can be done online. You have to fill in your basic details along with your identification information such as PAN card, Voter’s identification number, Aadhaar card, among other details. It will also have to reveal your past credit usage or loans taken and met.

What is a Good Credit Score?
A credit score above 700 is considered good and anything more than 850 is excellent. A healthy credit score is required to enjoy a smooth and hassle free credit experience. A low credit score can lead to difficulties in securing a loan. A credit score varies depending upon your credit footprint. Instances such as late payments or skipping a monthly instalment of a loan (EMI) can reduce your scores. It is advisable to have a good credit score and maintain it so that whenever you need to avail credit, you can do so swiftly. You can also grow your credit score over time. For that, it is important to have a good credit score and maintain financial discipline to ensure that it gets better with time.

Benefits of a Good Credit Score
A good credit score means that you are a responsible borrower and likely to make timely repayments. Let us look at some advantages of a good credit score:

• Qualify for attractive credit card and loan deals: A healthy credit score means that you are a reliable borrower and therefore lenders will want you as their customer. A good credit score will win you some attractive benefits on credit cards and loan deals. This may result in loans with relatively lower interest rates, longer loan terms and faster sanctions.

• Qualify for approval of higher limits: When you have a good credit score, you will see that you are being offered a higher credit limit based on every time you pay your existing dues on timely payments. An increased credit limit means that you can avail loans for large-ticket loans and/or for longer durations. This can result in quicker approvals on higher limit loans as well.

• Allows better negotiation for loan terms: A borrower gets a good creditscore after managing the credit well. Every lender is looking for a borrower who is less likely to default. With a healthy credit history, the borrower is in a position to negotiate the credit terms up to a certain margin to get a good deal.

• Indication of financial stability: As it is an indicator of the health of your financial standing, a healthy credit score can reflect very well on your overall financial lifecycle. Some insurers provide customers with good credit scores waiver of certain document requirements.

Tips to Grow Your Credit Score
Many believe that a bad credit score is a lost opportunity for availing credit options. However, your credit score will change over time based on your credit behaviour. Here are some simple tips to earn you better credit scores:

• Avoid defaults: Your credit behaviour is a crucial determinant of your potential financial health and each of your financial footprint is evaluated while calculating a credit score. It is essential that you make all your EMI payments on time and clear dues appropriately.By avoiding late payments, defaults, short payments, etc. you can improve your credit scores. This will enhance your credit history and the lenders will view this as a positive sign assuring them that you will look after your future debts with a greater responsibility.

• Keep a check on your Credit Utilisation Ratio: The Credit Utilisation Ratio is the ratio of your credit limit to your credit spending. This is the second most important element after credit history. A high ratio will earn you lesser points, denting your overall credit scores. It is advisable to keep the credit limit in check and secure credit wisely so that you do not overshoot your limit.

• Only opt for loans that can be managed easily: You may come across many quick and easy loan options and attractive discounts during sales. Many people make big-ticket sized purchases with down payments against their yearly bonus amounts. While it may work for many, some people may find it difficult to manage too many loans and miss out on an EMI. This can affect your credit scores. Therefore, it is wise to avail credit after a thorough thought on its need and repayment capacity.

• Do not delete your old accounts: A long credit lifecycle is a positive indicator of your credit management abilities and lenders pay close attention to your credit history. If you have a credit card that has been with you for a long time, it is best to retain it and continue to make your payments on time. This will reflect well on your credit scores. Building a robust payment record with a long-standing credit card can do wonders for your scores. In case you have been irregular with your payments, plan on how you can avoid it in the future so that you can eventually better your credit scores.

• Do not apply for multiple loans at the same time: Plan to have a good balance between unsecured loans, such as credit cards and secured loans like home loans, etc. to better your scores. Focus on having more secured loans will augur well for your credit scores.

• Monitor credit reports regularly: Regularly checking your credit scores is a good step to keep your credit behaviour in control. With constant monitoring, you can notice a shift in your credit scores and take the necessary corrective course. It will also give you a sense of your credit consumption and may flag any signs of any anomalies such as unknown transactions.

A credit score will be a benchmark for your credit consumption and a key deciding factor for your lenders to evaluate you. Many times, people are unaware of it until their loan is rejected. Therefore, do not wait till you apply for a loan to check your credit scores. It is something that is built gradually and can be improved steadily. Monitor your scores from time to time to be in complete control of your credit performance.

Navin Chandani, MD & CEO, CRIF Highmark

Source: Publication: Forbes.com,29th June,2021