Are you harming your credit score?
Delaying repayment of your loans and credit card bill isn’t the only way to lower your credit score. Credit bureaus check the likelihood of default by analysing your behaviour with credit.
While banks have always had a method of checking your creditworthiness, the concept of credit scores is relatively new to India. Currently, four credit bureaus operate in India, offering data to lenders as well as consumers. You may not think it necessary, but it makes much sense to find out your credit score before asking for a loan or showing interest in credit cards.
All four credit bureaus in India – CIBIL, Experian, Equifax and Highmark – let you purchase the report. At CIBIL, the cost of the CIR is Rs154, while at Equifax it costs Rs138. We recommend buying the report before taking on more debt for two reasons – to check if they’ve got all your details right and to find out what you’re doing wrong. Don’t simply assume that if you’ve never defaulted on your home loan and paid all your credit card bills on time you’ll have a perfect score. Here are five things you had no idea affected your credit score.
Being a guarantor If you’re a guarantor of a loan, you’ve agreed to repay the loan in case the principal borrower doesn’t. This information will also be found in your credit report under “guarantor”. While there will be no impact if the loan is repaid as agreed, your score will drop (perhaps without you realising) in case of delayed payments by the friend or relative you’ve stood guarantor for.
Asking for credit Ever heard that banks only lend to people who already have money? Well, that’s partially true. So, if you appear hungry for credit, by, for example, applying for multiple personal loans just to bargain for the best rate, your creditworthiness will gradually diminish. Consequently, lending institutions will view your application with caution.
Using up your credit If just asking for credit is bad, you can see how using it up is bad, too. Your credit score isn’t just your track record of repayment, it’s how wisely you’ve utilised the credit given to you. You may disagree, but it’s the system. If your credit limit happens to be Rs1 lakh and you’re regularly using up over 90% of it, your credit score could be lowered for being too aggressive with your credit.
Mix of credit So long as your debt-to-income ratio isn’t skewed, a home loan is much less likely to dampen your credit score than a mix of unsecured credit lines. If your CIR shows that you have multiple credit cards and have also availed of personal loans, it may not bode well for your credit score.
New to credit If you’re new to credit, don’t expect a high score. You’ll have no score. In fact, because you’re untested, you could also be rejected by a credit card company, particularly if you don’t work in a well-known organisation. One way to build credit is to get a secured credit card to prove you’re worthy of credit. Furthermore, CIRs don’t reflect your life’s credit history. If you’re 40, you won’t see a 20-year credit record. No. Your CIR will take into account utilisation and repayment over the past two to three years.