Typically, a score of 78% is considered good and 83% is considered excellent, while going below 70% indicates danger.
Most people are familiar with the percentage score that their children get in exams. Less-known, but equally important, is an individual’s credit score.
This is the score that a credit information company provides to prospective lenders. Cibil, for example, calculates a credit score apart from individual items on your credit report.
Higher the score, lesser the chances of default. Typically, a score of 78% (700 out of a maximum of 900) is considered good and 83% (750 out of 900) is considered excellent.
A credit information company uses its own formula to calculate a score that predicts the chances of that individual defaulting on a loan in the near future. If you have never borrowed in the past then you do not qualify for a credit score.
But why is a high credit score important? Well if you score below 72% (650 out of 900) it will be difficult to get a loan and if your score is less than 70% (<630) then unless there is a mistake in the data, that is eventually corrected, you can kiss goodbye to chances of getting a credit card or loan.
Not just that, your existing lenders periodically review your Cibil record (and score) and if you have a low score, banks will take precautionary action to prevent defaults such as slashing credit limits on your credit card even though you may have no dues and may be paying your amounts due on time.
Arun Thukral, MD, Cibil, says, “The credit score helps lenders make more reliable decisions, which are derived from robust data and objective analytics. It can also help reduce inefficiencies associated with manual subjectivity, errors and limited information. The score provides a complete picture of applicants by drawing data from a wide range of lenders and institutions covering the breadth of India’s financial services market.”
As of now, lenders use credit scores cautiously and negatively.
So what to do to get a high credit score?
First know what your existing score is. Remember, the credit score is not given to the customer directly when he makes a request for a credit report from Cibil. So in addition to asking for a copy of your credit report, you can make a request to the bank who is considering your loan or credit card application. This report is likely to contain your credit score.
The simplest way for a high credit score is to make sure you pay all your dues well in time. Nothing else can help you get a high credit score. Additional steps to improve your credit score are:
Scrutinise your credit report thoroughly for your name, address and PAN etc. Any mistakes will have an impact, as it is possible that some other person’s record has been mixed with yours. Your date of birth and PAN are the most important data items to check. Report any mistakes to Cibil and the concerned bank immediately.
There are certain other factors which you should work out to improve your credit score, besides paying debts on time:
The credit information shows the number of enquiries done by various banks for your credit report. If there have been many enquiries for your record, it indicates you are hungry for credit. But as long as the enquiries are bunched around the same time, that is not taken as a sign of credit hungriness. So plan for your credit in advance and apply to various banks together only when you actually take the loan.
If you have a credit card, you should at least use it one time to the maximum possible extent without touching the maximum limit. Of course, this should be for an expenditure that you anyway would have incurred. But remember to pay back 100% of your dues. For some strange reasons, most credit card companies do not report your credit limit to the credit bureau but instead report the maximum amount that has been outstanding on it.
So if you peak your outstanding in a month, in later months, your normal outstanding will appear as a small percentage of the maximum outstanding. This indicates that you are a prudent user of credit limits and have sufficient credit limits available to you should you need it in the future.
Do not keep unrequired credit limits (more than 2 credit cards usually never make sense). If you are looking at closing a credit account, then other things remaining equal, keep your older accounts with you, as longer the credit history, it becomes more valuable.
The market and the credit information companies are still learning about how and why defaults happen, so expect some more updates in the future as the market develops.
Till then, keep working towards a good credit score as it will go a long way in ensuring a relaxed financial life.
Credit Sudhaar is India’s first Credit Health management & improvement company whose goal is to help clients to Restore, Enhance and Protect their Credit and make them credit healthy