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Why you should have a High Credit Score?

My neighbor Tony was bit tensed last week. The bank rejected his housing loan application, even after he is having a decent job with a 6 figure monthly salary.

Reason? His CIBIL Credit Score was low!

What is Credit Information Report (CIR)?

A credit information report is a record of your borrowing and repaying activities. It contains information about where you stay, how you pay your bills. It shows your various loan repayments and how regularly you make your payments. It also reveals if you have been sued against, any default related to your payments or have filed for bankruptcy. Credit bureaus generate these credit reports. Experian is the largest credit bureau in the world, which is a US based firm. In India, Credit Information Bureau India Limited (CIBIL) is the leading organization in this area. These credit bureaus collect information about your credit activities, store it in their databases, and charge a fee for supplying the information. They collect this information from their members like banks, non-banking financial companies (NBFCs), credit card companies, housing finance companies etc. who have previously extended credit to you. Based on this they assign you a credit score.

Parts of a credit information report

A typical credit report comprises of the following:

1.  Name, Date of Birth, Gender, Telephone number, PAN Number, Passport number etc.

2.  Address – there is provision to keep upto 4 addresses.

3.  The accounts section lists all your accounts, installment such as car loan or home loan, or revolving credit in case of credit card. This part shows the date on which the account was opened, type of credit account. It also shows name(s) on the account, credit limit or highest card balance, amount of monthly payment, account status that can be open, closed, inactive, paid or other and lastly the promptness of payments.

4.  Enquiries the last section of the report deals with the enquiries made about you. It shows the name of the member that made the enquiry, the date when it was made, type of account for which the inquiry was made and amount of credit for which the enquiry was made.

In short, this report will tell how much credit you are using, are you defaulting in repayments, are you frequently applying for new credit, what type of credit you have etc.

What is Cibil Trans Union Score?

Cibil Trans Union Score is a 3 digit numeric summary of your credit history. Through advanced analytics, you will be assigned a score between 300-900 based on your credit history. This is your credit score. The higher this Score, the better.

Why this score is important?

Banks will gradually introduce risk based pricing of loans, which means, you will get loans at lesser rates, if your credit score is high. The loan approval process will be easy, if you have a high score.

A high score may help you in getting a good job. A credit report tells about your creditworthiness. Credit reports also provide valuable insight into your financial responsibility. This may be particularly important if the position involves handling cash, responsibility for managing money, or similar fiduciary responsibilities.

Who uses a credit report?

The following categories are using the credit report for their assessment about you.

1. Lenders, who are considering sanction of loan.

2. Employers, who are considering you for employment.

3. Government bodies, reviewing your financial status.

4. Land loards, considering giving their flats on rent to you.

How to get your Score?

You can choose to purchase your score (including CIR) or only your CIR. Fees for the CIR is Rs.142/- and Credit Score with CIR is Rs.450/-. You have to download the required form from www.cibil.com and send it to their office at Mumbai along with identity proof and address proof. You can make the fee payment online or by DD.

Factors that affect your score:

The following factors will affect your score:

1. How much is the level of debt?

2. Which types of loans you have taken? Secured or unsecured.

3. How many times you have missed the payments? How many new loans have opened and how many times you have applied for a loan?

4. Recency of events – how recently were the loan payments missed? How many loan accounts have been recently opened?

How to improve your credit score?

The following steps will help you in improving your credit score:

1. Pay your EMIs on time. Ensure that you have sufficient money in your account 1 day prior to the due date, in case of ECS.

2. Never miss to pay the ‘minimum amount due’ on your credit card in time. Though this is the costliest credit, if the payments are in time, credit card can help you in improving your score.

3. Do not have the habit of simply applying for all types of Cards, just to avail some co branded offers. Having more Cards and more loans will reduce your score.

4. Try to prepay loans in instalments, which will show a healthy trend from the credit point of view.

In case, you have some issues with any loan accounts or credit card dues, and opted for a settlement with the bank, get a closure certificate immediately and keep it with you. Check your CIBIL report later and confirm that, it is reported correctly. Otherwise follow up with the bank and get it corrected in the CIBIL records.

Tony has decided not to apply for any more credit cards in life and decided to settle his credit card dues immediately so that, he can apply for a home loan again after sometime, once his score is improved.

Yes, that is possible. This Credit system allows you to improve your score. Just pay off your debt and not opt for any more credit, until your score is improved.

 

8 Comments

  • V. Prasanna Venkatesan Posted July 12, 2011 12:17 am

    Very useful article. The tips are really useful and a powerful guide for financial discipline.

  • Stephen D’sa Posted July 12, 2011 7:32 pm

    I have used credit very badly in the past and now i realize what a mistake it was, pls guide me as to how can i be eligible for credit and how can i improve my score .

    Thanks

    • Finvin Posted July 12, 2011 8:13 pm

      It will take some time. Start making prompt repayments and EMIs in time. Once, you are regular in all these, apply for a CIBIL score card, as mentioned in the article. Once, you confirm that your score is improved, apply for credit. You will get it. All the best.

  • vijay Posted July 30, 2011 9:34 pm

    This is great article for investors.

  • Undefined Posted November 22, 2011 10:16 am

    thank you for helpful tips and simply good info

  • Surekha Posted April 3, 2013 11:40 am

    I have no credit card/loans on my name yet the bank has refused me a credit card stating CBIL score.

    • Melvin Joseph Posted April 5, 2013 5:37 pm

      Please check whether you were a surety for any body for their loan. If they don’t repay the loan, then your CIBIL score can be affected. Apply for a CIBIL Score and it will clearly show the reason for your low score.

  • JOSEPH JACKSON Posted April 25, 2014 10:29 pm

    All the articles related to credit cards are comprehensive with live examples and authenticity. A good stuff for a finance students to just replicate the same in his exam papers and sure of an excellent score.

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