Tuesday, 9 February 2016

Why do credit scores behave like the stock market?

The stock market is considered to be volatile, in that it can change depending upon the behaviour of the economy. If a stock appreciates in value and goes up high, it is likely to be because a particular sector or company within that sector is performing well. Similarly, if a stock dips in price, it can be owing to a downturn of the market scenario.
It would not be incorrect to compare therefore, a credit score to the stock market when it comes to the highs and lows. However, while the stock market does not depend on individual performance, the credit score does precisely that – depend upon the credit behaviour of the person whose score it is. If you service your debt wisely your score is likely to be on the upswing as compared to if you mismanage the credit you have availed of.
What is a credit score (popularly known as CIBIL score) ?
A three-digit representation of your creditworthiness, a credit score is an amalgamation of your credit report. Typically ranging between 300 and 900, a higher score is the key to being offered credit at competitive rates when you require any.
A credit score takes into account a combination of parameters and is the go-to piece of information before they take a decision to approve or decline a loan application. It helps banks or financial institutions determine the likelihood of a loan going bad, i.e. the customer defaulting on the loan.
Factors that determine the credit score
There are several factors that are taken into consideration when calculating the credit score, important among which are:
  • Repayment track record or payment history
  • The amount you owe lender(s), or the outstanding due on your loans/ credit cards
  • Credit history
  • Credit mix, i.e. type of loans including secured loans (such as housing or auto loans) and unsecured loans (for example, personal loans or credit cards)
  • New credit, i.e. the number of times you apply for fresh loans or credit cards, which indicates your financial solvency and dependency on debt
Tips to improve the credit score
In order to enhance credit score, below are a few tips you should know:
Make credit card and loan payments on time – When you have a loan EMI or a credit card bill due ensure that you make payments in a timely manner. Remember any missed payments or even delayed payments can have a negative impact on your score. When you pay up as per due dates, a lender tends to look at your application more favourably, as a customer who is diligent about payment is less likely to default even on new credit.
If you are unsure whether you will remember to pay on or before the due date, consider setting up payment reminders or alerts, or avail of options such as ECS mandate or standing instructions to your bank account to ensure your payments are always made on time.
Have a healthy credit mix – This is also important, as leaning towards a particular type of loan product can indicate dependency on credit. For example, too many unsecured loans such as credit card and personal loans can go against you and bring down your score. Bring into the mix secured (or collateral backed) loan products as well. This indicates to a lender that you are able to handle all types of credit well, and can maintain a healthy balance between the two.
Utilise the credit limit judiciously – It is never a good practice to max out on your credit card limit, or even come close to it. The ideal usage is 30 percent, which indicates that the borrower is likely to be financially solvent and can manage debt well. If you use a higher credit limit regularly it could serve as a red flag to a lender, as it seems possible that the individual is dependent on credit to make ends meet.
Don’t apply for too many credit cards – Unless you do need a new card, avoid applying for too many however attractive the offers may be. Keep in mind that most of these offers are only for the initial period and ultimately you need to pay up money. Each time you apply, an enquiry is made against your credit report, which can bring down your score. Further, using too many cards simultaneously can lead you to spiral downwards into a debt trap, as dependency on credit increases. If you find yourself making spends of even small amounts on your card, step back and rethink – do you need to revert to using cash only, until such time you get a hold on your finances?
Think before you co-sign a loan – Even if someone you know for years, whether a family member or close friend, is availing of a loan and is requesting you to co-sign or stand as guarantor, think for a moment before you agree. The reason being, if this person defaults on the loan not only will you as the second applicant have to make good the outstanding amount, but it will also damage your credit score in the process. Be very careful in choosing whom to help!
In conclusion
Following from the above, keeping in mind the factors that determine your score, it is wise to take due care when it comes to not just maintaining but also enhancing your credit score and credit report.
If you believe that you could use some help to improve the score, consider availing the services of a credit health management company such as Credit Sudhaar wherein with trained credit counsellors you can achieve a good or healthy credit score given time and financial discipline.
Ultimately, like the stock market that takes time to recover from a fall, so does your credit score – hence it is always wise to take adequate preventive measures to avoid a difficult situation.

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