Tuesday, 24 November 2015

Is the frenzy around credit score justified?

Nowadays every time you read about a personal loan, home loan or a credit card, you are likely to find a mention of how important it is to maintain a good credit score. The banking regulator of the nation, The Reserve bank of India (RBI) has made it mandatory for all banks and financial institutions to take the CIBIL score and report of an individual into consideration as a part of their credit approval process.
CIBIL, being the premiere credit bureau of the nation, the CIBIL score is referred to as a benchmark of one’s credit health. In a bid to attract customers, lenders are leaving no stones unturned to create awareness among borrowers about the importance of maintaining a CIBIL score of at least 750 (Out of 900) in order to for their credit applications to go through. So much is the importance of maintaining a good credit score driven home, that it would be no exaggeration to say it is close to hysterical levels, with prospective borrowers obsessing about their credit score. That brings us to the question, how justified is this hysteria around the credit score? In this article, we try and find some answers to that.
A reality check
As any financial planner worth his salt would tell you, your credit score is nothing but a reality check. Let us make a comparison with your physical health here. Say your doctor recommends that you run a lipid profile test and find that your LDL (bad cholesterol) level is ranging between 130-160 mg/dl (the normal level is under 100 mg/dl. Cholesterol level is measured in milligrams (mg) per deciliter of blood (dl)) your doctor will ask you to become cautious about your health as a rise in LDL level in your blood means that you run the risk of a heart ailment sooner than later. He may recommend that you go on a diet and exercise in order to bring down the LDL level in your blood.
The very same principle can be applied to your finances, where your CIBIL or credit score becomes the measure of your financial health. So if you have a CIBIL score of 750 and above it is indicative of the fact that your finances are in order and you have maintained good credit behaviour. On the other hand if your credit score has dipped well below 750, it is time for you to take corrective measures to improve your credit score and thus improve your financial health in turn. But is having a poor credit score the end of the world? The answer is an emphatic NO!The three digit credit score is not what you should obsess about and rather focus on your financial conduct. The important thing to bear in mind is that your credit score is a reflection of how you handle the credit that you have availed of and how you handle money matters in general.
Credit score- A by-product of your financial habits
If your financial habits are good right from the very beginning, your credit score is bound to be good. The cardinal mistake people make is to lose sight of what is really important as far as finances are concerned and concentrate on maintaining high credit scores instead. For instance, if you have a high credit score, but are finding it difficult to pay your monthly bills, you definitely have a problem in hand.
In order to increase your credit score, you must therefore concentrate on having good financial habits from the very beginning of your career. Instead of getting carried away by the lure of money, inculcate good habits from the very beginning. First things first make a financial plan according to your age, income and financial responsibilities at the moments and liabilities and ambitions that you perceive a few years down the line. If you are unable to do it yourself, take the help of a professional financial advisor.
In India, people are still wary of professional financial planners, as they are not very keen on paying for the financial advice that they receive, but what they do not realize is that for a minimal fee that a professional charges, he is able to correctly decipher your needs, goals and ambitions and chalk out a blue print for your accordingly. A god financial plan is the first right step towards maintaining good financial health.
Handle credit judiciously
Secondly it is important not be wary of credit, but to handle it responsibly. For instance, more often than not first time employees of a medium or bid sized company are often soft targets for lenders keen to sell credit card and loan products. Just because, you have access to your own money, do not be reckless from inception. While it is a good idea to apply for a credit card, if you have just joined a job and do not have a credit history yet, make sure you use it carefully, and pay your outstanding amount in full every billing cycle. Inculcating good credit habits is the best way to improve your CIBIL score fast and keep it consistently high.
Of course, there are short term blips that bring your CIBIL score down temporarily, but do not get distressed about it, for a credit score is not etched in stone. If you are under financial duress because of a financial problem that has hit you, concentrate on solving that problem, instead of trying increase CIBIL score. However if you have taken the effort of chalking out a financial plan, paid your credit card bills in full each month, built up an emergency fund that takes cares of your expenses for at least three to six months and are investing regularly in a retirement fund, there are little chances of financial trouble, even in the face of a mishap.
In conclusion, let’s reiterate that while it is important to maintain a good credit score and make consistent efforts to improve CIBIL score, it should be done by maintaining good financial habits and good credit behaviour. Instead of getting hysterical about your credit score and taking wrong financial decisions for fear of diluting your score, take good care of your finances, just as take care of your health, and your credit score will automatically remain high.

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