Friday, June 07 2019
Source/Contribution by : NJ Publications

Have you ever heard of the term – Credit Score? If not, it is perhaps one most important thing you have to learn about.

What is it?

A simple definition is that a credit score is a numerical score which is calculated based on an analysis of your personal creditworthiness. It factors in your present financial situation and your past financial behaviour. The data used to calculated your credit score is procured from various financial institutions or credit bureaus who maintain such information. All your records with banks, lenders, depositories, credit card companies, etc. have a lot of data on your finances which are used in calculating the score. The agencies which calculated the credit scores are

How is it used?

Credit score is primarily used by lenders, such as banks, housing finance and credit card companies, to evaluate the potential risk posed by lending money to you and to mitigate losses due to bad debt. The credit scores are used to decide important things like

  • loan eligibility or qualification

  • interest rate to be levied

  • limits of credit

In other words, the lenders decide on the risk you pose and the revenue that can be made from you. As India gets data rich and more and more financial transactions are captured, such scoring mechanisms are bound to be used not just by lenders but also by others like insurance, land-lords, government departments, telecom companies and so on. Don't be surprised if few years down the line, your credit score is asked along with your Kundali /horoscope for marriage! And to think of it, there is a strong reason to ask for it.

You can get your Credit Score or a detailed Credit Report from the bureaus providing same, either free or for a cost.

Who has credit scores in India?

In India, there are four credit information companies licensed by the RBI who has jurisdiction on the same. These bureaus have their own methodology to calculate the credit scores. The Credit Information Bureau (India) Limited (CIBIL) is the most popular one who has developed the so called CIBIL Credit Score. There are three other bureaus namely, Experian, Equifax and Highmark who have been given licenses by RBI to operate as Credit Information Companies in India. These

Talking about CIBIL Score, it is a three-digit number that ranges from 300 to 900, with 900 being the best score but very rare. Typically a score of about 750 and above is considered very good. Individuals with no credit history will have a no-hit or NH. If the credit history is less than six months, the score will be 0. CIBIL credit score takes time to build up and usually it takes between 18 and 36 months or more of credit usage to obtain a satisfactory credit score. The higher the score, the better it is for you.

How can I improve my Credit Score:

There are many things that go into defining your credit score and there is no way to know how the bureaus calculate it. However, keeping the following things in mind will surely help you in keeping your credit score healthy:

  • Income: Have a good and regular income stream (cash dealings not counted here!). Try to channelise / deposit all your incomes through your bank accounts at regular intervals, especially if your a businessman.

  • Repayment: Do not let any payments get rejected due to lack of funds (the biggest spoiler!). Always make sure that your bills, especially EMIs and credit card bills are paid on time.

  • Investments: Have investments made in format investment avenues (physical gold/real estate won't help!). Have investments in relatively liquid avenues like mutual funds, shares, bank deposits, etc. helps your scores.

  • Debt: Do not have debt or too much of it (that's the counter weight to your assets!). It shows that you are credit hungry. Try to have less than 40% of your income going to all loan servicing. Also try not using the full limit on your credit cards. If possible, start paying off your loans, starting with the most expensive ones first.

  • Debt Mix: Have a fine balance between secured and unsecured loans. Unsecured loans have slightly less weight as new lenders prefer them against already secured loans.

  • Inquiries: Do not use / request credit score or report often (it means if you are upto something!). Regular inquiries or asking multiple lenders, who in turn request scores, for loan details means that you are desperate for same. Better is to research online before sharing your requirements with lenders.
     

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