Tuesday, 8 December 2015

Role of CIBIL Score in getting better Rate of Interest

Looking to buy a new car or your dream home? If you’re looking at availing of a loan to make that all-important purchase, do keep in mind that your credit health will be a very crucial role in the process. Let’s take a look at all that it entails, and why you should remain credit healthy.

When you apply for a fresh line of credit, be it a loan or a credit card, the go-to document for a prospective lender or credit card issuer is your credit report. This is extensive data about your credit history, previous and ongoing, generated by a credit bureau or credit information company, basis information received from its members, i.e. lenders and other financial institutions.

What is a credit report?

A credit report takes into consideration details about your debt repayment behaviour – essentially, how well you handle debt as a consumer. Information about your past loans and/ or credit cards including the repayment pattern, whether outstanding payments have been made in a timely manner, the type of accounts (secured such as a home loan, or unsecured such as a personal loan), duration of credit history, and the number of accounts is factored in.

What is a credit score?

An important component of the credit report is your credit score. Essentially a three-digit representation of your report, the score summarises all the information contained therein. When a lender views your application and evaluates it, the report (and score) helps them to gauge your creditworthiness – that is whether lending to the prospective customer is worth the risk. For example, if a report shows a payment default on a loan account, chances are that the consumer is not financially solvent and is unable to make timely payments on an existing account. Hence, it is likely that with a new loan, the financial burden will only increase and the likelihood of the loan going ‘bad’ is higher than it would be otherwise.

What is a CIBIL score?

In India, CIBIL is the oldest of four credit bureaus – the others being Equifax, Experian and CRIF High Mark - operating today following licenses from the Reserve Bank of India. As a result, credit score as a term is used interchangeably with the term ‘CIBIL score’. However, all bureaus provide credit scores, and you are free to obtain copies from any or all, if you so require.

Why should one be credit healthy? What role does the credit score play?

Globally, the usage of credit scores is going beyond just financial services. It is used in areas including procuring a new mobile phone connection, as a part of pre-employment screening and even before renting out a home to a prospective tenant.

In India too, the usage is now increasing, and it is virtually the norm for lenders to check a report before taking a decision on a loan or credit card application. Hence, staying credit healthy becomes vital, if you want to ensure that you get your loan or card at the most competitive rate of interest. Here’s how.

A score is typically between 300 and 900, and a higher score normally means that a lender looks at you more favourably. This is basis your credit history – when you pay existing dues on time, you are more likely to be a person who uses debt responsibly. In this case, a lender would be more comfortable extending fresh credit to you, and hence offer you the loan or card at the best interest rates.

Consider someone with a low or ‘bad’ score – it is very likely that this person requires debt to make ends meet, whether it is over-using a credit card or taking multiple loans for various purposes. Let us take an example – when you get a credit card, a credit limit is assigned to you. The ideal credit utilisation ratio is 30 percent, and regularly exceeding this could signal to a lender that the consumer is likely to be insolvent. This reflects on your report, and consider a situation wherein a consumer regularly makes delayed payments, or skips payments altogether. This would certainly set alarm bells ringing for any financial institution, and it is highly likely that any request for further credit would be denied. Hence, staying credit healthy is important for one’s financial future.

How to boost your credit score

Ensure you pay all outstanding dues on time, and there are no regular instances of delayed payments or missed payments.

Further, apply for fresh debt (whether a loan or card) only when you really require one, as regular enquiries or ‘hits’ on your report can bring down the score, albeit temporarily.

Stay within your credit limit, preferably not exceeding the ideal credit utilisation ratio. This shows that you know how to use credit judiciously.

Remember, not having a credit history isn’t always a good thing. Hence, do maintain a card, for example, with timely payments on your credit record. Over time, ‘good’ old debt will bump up your score.

Now that you know some ways of how to boost your credit score, it is never too late to get started. However, if you believe that your score is low, and you would want to increase your CIBIL score, consider getting in touch with a credit health management company. In tandem with a trained credit counsellor, over time you would be able to not just increase CIBIL score but also improve it. Hence, while in the initial period the task may seem uphill, with patience and some financial discipline, it is definitely not impossible to achieve! This will mean that when you truly do require a loan or card to fulfil that long-thought of dream, you will be offered credit at the best possible rate of interest and other terms.

Hence, stay focused and become credit healthy!

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