A credit score is one of the most important parameters in deciding the terms, conditions and the amount of loan that will be sanctioned to you in India. A credit score is a number that displays a borrower’s credit worthiness to lenders such as banks and NBFC’s. There are four credit information companies in India namely – CIBIL, Experian, Equifax and CRIF High Mark. CIBIL is the oldest and the most reputed credit bureau in the country. This is why credit score is alternatively called CIBIL score in India.
Having an excellent credit score only increases the chances of getting a higher loan and favourable lending terms. First time borrowers at times face difficulty in getting loans as there is no credit history available for the lenders to scrutinize. It is advisable for first time borrowers to first build a credit history by using a credit card. Then they should go for a loan.
Generally a credit score of 750 and above is considered excellent. A credit score of 600 or below is considered poor and would create significant difficulties in getting a loan. Even if your credit score is average or poor, all is not lost. The score can be improved by following a few simple steps mentioned below.
#1 – Pay dues on time
Timely repayment of outstanding dues helps to improve the credit score almost immediately. It also helps to avoid late fee charges and fines. Set reminders for payments and get disciplined about meeting payment due dates. You can also use the auto-pay feature so you don’t miss due dates.
#2 – Avail credit wisely
Taking too many loans at a time displays that you are stuck in a never-ending borrowing cycle and have insufficient funds. This impacts credit score negatively. Keep your loans to a minimal. Repay the current loan in full and then take on a new loan. When you repay the loan in full, your credit score gets a boost.
#3 – Take the right type of loan
Try to maintain a healthy combination of loans. It is better to take secured loans like home loan, car loan than an unsecured loan like personal loan. Having many unsecured loans, can adversely impact the credit score.
#4 – Monitor the repayment status of your guaranteed and joint loan accounts
In co-signed, guaranteed or jointly held loan accounts, you are held equally liable for missed payments. Your joint holder’s (or the guaranteed individual) negligence could affect your ability to access credit when you need it. It is recommended to avoid becoming a joint account holder or a guarantor of loans.
#5 – Review your CIBIL credit score report regularly
Review your CIBIL score and report regularly to check for any inconsistencies. Sometimes, CIBIL may make mistakes while updating your records, incorporating incorrect information against your report and delay in recording details. Sometimes a loan you may have repaid may not have been updated on the credit report, which could have a negative impact for you. If you notice such errors, get them rectified instantly.
#6 – Apply for loan only when you need it
Take a loan only when you genuinely need it. Do not take a loan to buy something which you want but don’t need it. Always check if you have the financial capacity to re-pay the loan before you apply for a loan.
#7 – Take a loan repayment tenure which is longer
A longer loan repayment tenure helps to build a good credit history over a period of time. It also reduces the monthly financial strain as the equated monthly installment (EMI) is manageable to pay. For example, if you are taking a car loan opt for a four year repayment instead of a two year or three year loan tenure.
#8 – Increase your credit limit but utilize it to the minimum
One of the best ways to improve your credit score is to get the credit limit increased but utilize it to the minimum and only when you genuinely need it.
By following the above steps consistently, you can definitely see a positive impact on your credit score over time. Improving credit score or building a good credit history is not an overnight exercise. It takes time, discipline and consistency.
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