How To Improve Your Credit Score?

Time to read: 4 mins | June 11, 2017

‘The Times They Are a-Changin' – a song by Bob Dylan, has so-much relevance today.

Bob Dylan had it right! Things are very different today than they were a generation ago. Today’s generation spend a lot more than what our parents and grandparents did.

Apart from the fact that cost of living has gone up, consumerism backed by a credit culture has played a vital role. Walk into any mall and the picture is evident, with people swiping credit cards and opting for easy finance options for all the fancies of life without much thought.

Along with rise in income, people’s aspirations have stretched bounds. We want to own our dream homes faster, buy the latest fully loaded sedan, take more exotic vacations abroad, avail the plethora of lifestyle choices and wish to achieve all such life goals and dreams in no time.

What is scary is all this is funded without much cash available in the bank account. It is backed by access to credit cards and loans…which may infuse a risk of personal finances going awry for individuals, if not planned well.

But in this process, we often do not realise that credit information bureaus (such as CIBIL, Experian, Equifax, HighMark) watch our credit behaviour quite closely and provide for a credit score which denotes our credit worthiness. The Reserve Bank of India (RBI) oversees credit bureaus including CIBIL, and all of them are governed by the Credit Information Companies (Regulation) Act, 2005.

Here are some of factors that credit information bureaus or agencies take into account while assigning a credit score:

• Payment history
• Credit usage
• Duration of the account
• Type of loans (consumer loans, home loans etc.)
• Number of enquiries to avail credit / loan

Based on factors given above, final score ranging between 300 and 900 is given.

Higher the score, the better is your credit worthiness. Ideally a score of above 750 is considered good.

To put it simply, if you have a credit score of above 750, you’re considered to be a better borrower as you probably make payments on time. The lenders that may lend to you face a lower risk that you will default.

But if your credit score is low, following would be the implications…

• You may find it difficult to get a loan in future
• Lenders may charge you a higher rate of interest if they extend a loan
• Lenders would capitalise on higher loan processing fee

Why? …Because with a low credit score, lenders are exposed to high risk of default.

So, as a responsible individual, always endeavour to keep your credit score healthy. Make it a point to bite only as much you can chew. Refrain from opting for too many loans that can impair your credit score, jeopardise your long-term financial wellbeing and pull you into a debt-trap.

Now, CIBIL offers one free report along with the credit score, every year. The intent is to help create awareness among borrowers about their creditworthiness so that corrective measures can be taken to improve the credit behaviour. If you wish access your free CIBIL score follow these 5 easy steps:

STEP #1: Visit https://www.cibil.com/ .

On the Home page, scroll down to the section where it’s mentioned – “click here to get your Free Annual CIBIL score and annual report”.

STEP #2: Register on “Get Your Free Annual CIBIL Score And Report Online”

In the free online order form, you need to fill in your personal details such as name, date of birth, PAN details, address, etc. Please fill it carefully. Ensure that you submit the correct mailing address and details.

STEP #3: On the Next Page, Click On “No Thanks” Option

Once you fill in all the details a pop-up suggesting subscription to CIBIL will appear. The CIBIL subscription of course offers more benefits as compared to your free copy, but in case you’re unwilling to pay, just click on the “no thanks” option and go ahead.

STEP #4: A Mail Will Be Sent To Your Registered Email Id.

Once all your details are submitted, you will receive a SMS about your credit score and an email will be sent to your registered email id, with a subject line “CIBIL – Access myCIBIL for your CIBIL report”. The mail carries the link to the “mycibil” login page and a one-time password.

STEP #5: Use the Password and View Your Report

Once you are on the “mycibil” login page, type in your registered email id and one-time password you receive, confirm the captcha code, accept the terms and conditions, and click submit to view your credit score and report online.

Being an online report, you will be unable to download or save this report. However, you can take a printout and keep it with you for future reference. You can even revisit your CIBIL score and the ‘Free’ report by logging in to your CIBIL account in the future.

The report contains your basic information such as name, date of birth, address, past payment history, overdue amounts if any, records of all the credit you have taken in the past, number of inquiries made by different lenders on you and so on. This information is useful to understand your credit worthiness.

If your credit score is low, here’s how you can improve it…

• Pay your EMIs on time for all kinds of loans
• Clear all your past over dues at the earliest
• Do not rely too much on borrowed funds
• Use your credit cards in moderation – set a monthly limit for yourself
• Pay your credit card bills on time, and ensure that the outstanding amount is paid in full to avoid a credit card debt trap
• Avoid withdrawing cash using a credit card
• Do not opt for multiple credit cards or apply for multiple loans unless and until necessary
• While you close any of your loan account(s), do not forget to enquire with your lender whether they have informed the same to credit bureaus… once all the loan closure formalities are completed.

Remember, while you close your loan account(s) in full, do not forget to obtain from your lender closure letter or No Due Certificate (NDC), statement of account(s), original documents that you may have submitted to the lender and remove lien on assets…all this would act as evidence for you and help you elevate your credit score in future.

Also if the lender has not intimated the credit bureau about the closure of your loan account, do it by yourself (by writing to them and submitting the requisite documents as proof).

In case you come across your credit report and find that your credit score is low, not due to past indiscipline, but due to an error on the part of the lending institution or on the part of the credit bureau, you should immediately notify both – the institution as well as the credit bureau / agency.

By maintaining a good credit score, there are chances that when you are in need of finance in future, you would get a better bargain – avail loan at a reasonable cost. The Reserve Bank of India (RBI) has suggested banks to use credit scores to price loans optimally. So, if your credit behaviour is good, you will be incentivised.

But while your credit score might be the basis for banks to take a call on your request for cheaper loan; banks may consider the following as well….

• Factors such as your income and occupation may be helpful to banks in determining the level of risk they might be exposed to.
• In case you hold a saving bank account with the same bank; it may try to analyse your saving account history as well.
• Some banks may even demand your income-tax returns (ITR) of the past few years

When combined all these aspects, banks may get a fair idea about your financial health and credit behaviour.

What if you are unable to fix your Credit Score by yourself?

Well, there are host of credit counselling organisations helping those in a debt trap. Hence, if you are in a situation of debt overhang, don’t shy away from seeking services of such an organisation.

Don’t worry about the fees. These agencies typically being non-profit organizations, their fees are minimal. They may help you with a debt management plan and even negotiate with the lender on your behalf, thereby try and get you a lower rate of interest to repay your outstanding debt.

So you can contact a credit counselling agency you deem fit to help you out for both situations i.e. correcting an error or getting out of a debt trap. Simply knowing that you are not alone in your struggle of repayment of debt, will give you some peace of mind.

Conclusive points…

• While you may indulge in credit / debt, overdoing it can be hazardous to your wealth and health.
• Taking calculated risk is okay to build wealth and meet aspirations of life. But ensure that you don’t get into a habit which can lead you to a debt storm.
• Stretch within your means, and do not take long leap which can jeopardise the financial well-being of your family and land you into a debt trap.
• To make sure you don't take more debt than you can handle, have a financial plan in place. One of the many benefits of a financial plan is that it lays the foundation for financial prudence and will show you how your cash flows are structured year on year, thereby helping you know how much EMI you can afford to pay in the coming years.
• Remember: if you are a safe borrower, you would score well on your credit worthiness.

So, before the bank or the lender surprises you with a negative feedback on your credit score, it is recommended to keep a regular track of it and maintain a healthy creditworthiness.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.