Credit Score
I have often seen my US based friend debating over which card to use for a transaction and calculating how his credit score would be affected but didn’t really understand what this score was and how it affected his life – only that it was majorly important!
Now it is time here in India that I better understand what a credit score is, how is it calculated and how it affects me. Because the next time I apply for a new credit card or a loan, the answer will depend on my credit score.
A credit score takes a ‘snapshot’ of your credit report and through advanced analytics turns the information into a 3-digit number representing the amount of risk you bring to a particular transaction. More simply your credit score sums up for the bank, the credit card company or any other financier, your credit worthiness. It will indicate to these people how risky it is for them to give you the loan or the card that you are asking for.
So if you have been good, and paid your EMIs on time, made credit card payments regularly and not taken too much of credit then you have a favourable score and you can definitely negotiate and get a lower interest rate on your loan and get many more benefits as an individual with good financial discipline. The reverse is true as well, if you have defaulted on your EMIs time to time or delayed card payments, or your cheques have bounced often enough, then your score will reflect this and the bank can decline completely or offer you a loan but at a higher rate of interest.
From the financier’s point of view, the credit score will not only help them reduce defaults but also make loan disbursing faster, improve operational efficiency and bring costs down. Where earlier, they had access to your history only to the extent that you transacted with them, now they have a much more comprehensive and broader view of your creditworthiness, which would enable them to take better decisions.
So what makes up your credit score?
- Credit utilization – If your borrowing capacity is Rs.1,000 but you have borrowed only Rs.500, you will have a better score. Alternately, if you have not only borrowed Rs.1,000 but are looking at other lines of credit then you are over leveraged and hence your score will be poor.
- Payment defaults – Your history of making payments whether EMIs or credit cards or other bills in a timely manner will be a big boost to your score. But if you have consistently defaulted on payments, run up overdrafts and credit balances then obviously your score is going to be bad.
- Trade attributes – How long you have held different lines of credit would impact your score. The longer your history with your bank and your credit card companies, it means a better credit score.
Ultimately a good credit score is good financial discipline of paying your dues on time, of spending well within your means and hence not overleveraging.
As of now it is still early days in India with only CIBIL, The Credit Information Bureau (India) Ltd. issuing a credit worthiness reports by way of a credit score to enable banks and credit card companies to make quick and objective credit decisions. However, there are other companies like Equifax, Experian and Highmark which will soon start operations in this area so that eventually we will have better information gathering systems that weed out errors and streamline the existing systems.
Presently CIBIL gives you a score that lies between 300 and 900 and sums up your credit record. It is inversely related with the risk of your defaulting on repayment for more than 91 days. Hence a score of 750 or 800 is good while a 400 or a 450 would be undesirable.
Getting familiar with credit score and how it works can save you a lot of trouble. Remember to pay your dues in time and keep your record clean. Someone is watching you!
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