What's your score?

Adhil Shetty answers your questions about credit score


Chances are that you don't know your credit score, or have never seen a copy of your credit report. It is also likely that you haven't yet applied for a loan because it is only then that most people find out for the first time what their credit score is. So what exactly is your credit score? What does it reveal about your state of your finances? And how does it sway a lender's decision to give you a loan or a credit card? Let's take a deeper look at the subject by answering eleven elementary questions.

What's a credit score?

A credit score is a numerical manifestation of your creditworthiness. It is a number ranging between 300 and 900. When you use a credit card or take a loan, your borrowing and repayment habits are reported by your bank or lender to credit information companies, who use this information to compute your credit score.

What are CICs?

A CIC, or credit information company, is an independent third-party institution that collects financial data regarding loans and credit cards about individuals and shares it with its members. Banks and non-banking financial institutions are usually the customers of credit information companies.

The CIC collects financial information about individuals and forms a credit report based on their financial history. Today, there are four major CICs in India: Experian, Cibil, Equifax and High Mark.

How does my score matter?

Your credit score is a reflection of how you've managed your debt. If you've been repaying your credit card balance and loans in full and on time, you will be rewarded with a healthy score. This makes it easier for you to take further loans.

If you've been negligent with your repayments, your score will be poor, and you will find it tough to take new loans or get a credit card.

When to find out my score?

Most people don't encounter their credit histories till they need a loan. But you don't need to take a loan to find out your credit score. You can do so at any time. The RBI, which gives the licences to the CICs, has mandated one free credit report per year for individuals. As a habit, you can do one check every 1-2 quarters to keep a track of your credit score.

Where to get credit report?

You don't even need to get up from your chair to get your credit report. You can go to the website of any CIC and sign-up for your free credit report for the year. If you've already availed yourself the free one, you can pay a small sum online to get additional reports for the year. If you don't wish to pay, you can get your credit report for free. Just Google for "free credit report" and get one in for free in three minutes flat.

Need a loan? What to expect?

If your credit score is above 750, you can expect some of the best loan deals. Increasingly, banks are linking the loan interest rate to the credit score. When you apply for a loan, be prepared to have your credit history examined by the lender, who will go over such details as credit card and EMI repayment record, the number of loans and credit cards you own, how much of your available credit you are utilising and what's your existing loan balance.

Why don't I have a score?

If you've never taken a loan or a credit card, you don't have a credit history. Therefore, you may not be assigned a credit score. If you've used only an add-on credit card, you may still not have a history. This isn't a calamity. You can start developing a credit history by taking a loan or a credit card against a fixed deposit.

Why is my score low?

There could be many reasons for this. The main reason is that you've been negligent in repaying your credit card dues or loan, or have defaulted on them. The other reasons could be that you're hitting your spending limit frequently (a sign of hungriness for short-term credit), you have more unsecured loans (such as cards or personal loans) than secured ones (such as home loans), or you have been frequently applying for loans and credit cards.

Each new loan or card application leads to a credit score inquiry, which chips away at you score. Also, there's the possibility that the information shared by your lender isn't correct, and the factual errors have led to a wrongly calculated score.

Is credit card use a worry?

No, it's not. A regular, disciplined use of your plastic money is good for your credit score. Make sure your credit utilisation (the part of your spending limit actually used) is in the 20-30 per cent range. For example, if your spending limit is Rs 100,000, try and stay within the Rs 30,000 range. Second, always repay in full and on time. Late payments not just reflect on your credit history, they also cost you penalties and hefty interest rates.

How can I improve my score?

Improve your repayment habits. Assign an ECS mandate for your credit card to automatically settle your bills every month. Keep track of your EMIs and make sure your linked accounts have sufficient balance. Take a mix of secured and unsecured loans. The repayment of long-term secured loans will have a big impact on your score.

How to report errors?

Errors in your credit history may lead to mistakes in your credit score. The mistake may exist in the credit history shared with the CIC by your lender. You could also be wrongly assigned someone else's credit history. To rectify this, you may initiate a grievance redressal process with your CIC. If the errors aren't resolved, you may need to take the matter up with your lender.

The writer is CEO of BankBazaar.com


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