Improving your credit score

Since the growth of the credit information industry, the only scoring model being used by lenders is the CIBIL TransUnion Score.

This score assigns a number from 300 to 900 to a borrower based on his or her credit history. The higher the numerical value of the score, the lower is the risk associated with the individual.

This is how it works.

The score is made up of mainly the following factors:

•       Credit Utilisation : How much credit is the consumer using?

•       Defaulting : How many accounts are past due – how much and by how many days?

•       Number of inquiries : Has the consumer applied for additional credit lines?

•       Trade Attributes : How old are this consumer's lines of credit?  What type of credit does he have?  Does the consumer have a good mix or balance of credit or is it all credit cards? It is important to understand how to manage your credit score.

HEALTHY SCORE

Here are some ways to make sure that you are being financially disciplined and thereby maintaining a healthy credit score:

•       Pay your loan EMIs on time. When you have more than one loan running, it gets difficult to repay them or keep a track of them. So make regular and timely re-payments of your loan to maintain your credit level

•       Never fail to pay the minimum payment on your credit card. It is advisable to make full payments on your credit card every time.

Credit Card is categorised as revolving credit and it helps in building a good credit score if payments are regular

•       Do not apply for loans or credit cards if not required, as this would mean more credit exposure. This could affect your credit score. Instead of applying for another loan, try checking for a top-up loan option on your existing loan. This will make your debt burden easier to manage

•       Use some of your savings to repay some of your debt. Always plough back extra income to reduce your debts. This will increase your credit score level

•       Avoid going in for settlements. Although you make payments for your purchases, in a settlement case, it would bring down your score level. And never get into a write-off scenario. This means not paying your dues at all

•       Review your credit history and credit score frequently, throughout the year.

Benefit to consumer

How does credit scoring directly benefit the consumer?

Speedier access to credit : When a consumer applies for credit, lenders use the credit score to make faster, more consistent decisions, thereby eliminating much of the risk of human error and subjectivity. Most leading lending institutions in India are already using the CIBIL TransUnion Score for making credit related decisions.

Even significant lending decisions can now be made in a matter of hours or minutes rather than days or weeks with credit scoring.  

This enables faster processing of loan applications and thereby speedier access to credit for consumers.

Availability of affordable credit at better terms : In addition to both speed and convenience, credit scoring also may make credit cheaper, which means lower costs to consumers. Without objective credit scores, lenders may set prices in a subjective manner.

This may result in credit products that are expensive for low-risk consumers and inexpensive for high-risk consumers.

By reducing costs of extending credit, credit scoring may enable lenders to give credit to more customers and at overall lower costs.

Credit Scoring increases access to credit and drives sustainable credit penetration. It improves loan performance by reducing delinquency rates and containing NPAs. Credit penetration is achieved by significantly identifying “good borrowers” (low credit risk) that otherwise would have been misidentified as “bad borrowers” (high credit risks) and, therefore, would have been denied credit.

At the same time, bad risks now have credit denied to them or are no longer subsidised by lower-risk individuals. In the aggregate, lending is increased, leading to greater economic growth, rising productivity and in turn greater financial inclusion.

(The author is Senior Vice President - Consumer Relations, CIBIL)