How to Improve Credit Score
What is a Credit Score?
A credit score is a three‑digit number (India: 300–900, US: 300–850) that represents your creditworthiness. Basically, it shows how reliable you are at repaying borrowed money. Lenders use it to decide whether to approve loans or credit cards and what interest rate to offer based on your score.
- Definition: Credit score is the numerical measure of creditworthiness, based on your borrowing and repayment history.
- Purpose: It helps banks/NBFCs/FI to assess the risk of lending to the customer. Higher the credit scores result in easier loan approvals, lower interest rates and better credit card offers; while lower scores can result in rejections of loan application or attracts higher interest rate.
- Impact: An objective thing like the credit score will not only help the banks to reduce defaults but also make loan disbursing faster, improve operational efficiency and bring costs down.
What’s a Good Credit Score?
Whether a score is good or not will depend on the bank’s internal policy, its customer profile and its risk appetite. Some bank may perceive 700 as a good score and another may not. But credit score is only an indicative tool for managing risk and its effectiveness depends on the banks’ internal control mechanism.
However, followings are the general credit score ranges in India and their impact:
- 300–499: Poor – very low approval chances.
- 500–649: Average – loans possible but with high interest, may need guarantor.
- 650–749: Good – most loans approved, moderate interest rates.
- 750–900: Excellent – best approvals and lowest interest rates.
Credit Scoring Model (How it is calculated)
CICs typically build scores using three historical data files:
- Defaults on previous credit transactions.
- Payment behavior/ Payment history.
- Previous searches/inquiries.
Further, credit bureaus in India compute scores using:
- Payment history (35%) → Timely EMI/credit card bill payments.
- Credit utilization (30%) → How much of your credit limit you use.
- Length of credit history (15%) → Older accounts boost score.
- New credit inquiries (10%) → Too many applications lower score.
- Credit mix (10%) → Balanced use of secured (home/auto loans) and unsecured (credit cards/personal loans).
Managing the Credit Score
To effectively manage the credit score, the following points are very important.
- Credit Utilization: Effective credit utilization is a very important step in individual’s credit score. If your safe limit is Rs.10000 and you are using only Rs.5000, then you are a very safe customer. If your limit is Rs.10000 and you are not only fully using it, but also seeking further credit, you could be overleveraging yourself and your score could fall.
- Payment Defaults: How many past accounts are due, by how many days and by how much? The fewer, the better and vice versa.
- Trade Attributes: How old are your lines of credit and what type are they? Do you have a good mix or is it, say, all credit cards? A history of consistent repayment of various types of credit will improve your score.
Positive Side of Credit Score
A good credit score will indicate the character of the borrower in his financial matters. The following are some of the indicators of good score.
- Evidence of financial discipline.
- If the borrower has defaulted once or twice due to reasons beyond their control, those would show up as clear aberrations in an overall consistent payment history.
- The longer the credit history, the better. The lender’s assessment presumably improves as he gets bigger spans of repayment. One should be judicious about closing old accounts and opening new ones.
Warning Signs in Credit Score
The behavioral pattern of the borrowers will impact the credit score of the borrowers. The following are some of the signals.
- Craving for credit.
- Frequent and unnecessary shopping for credit.
- Several new accounts or recent requests for loans can be taken as signs of an over- hungry borrower.
- The length of credit history is also important. Older accounts are generally better, so you should be judicious about closing old accounts and opening new ones.
- Trade attributes – does the customer use a good mix of credit?
Credit Information Companies (CICs) in India
Presently, four CICs have been granted Certificate of Registration by RBI. In terms of Section 15 of the Credit Information Companies (Regulation) Act, 2005 (CICRA), every Credit Institution shall become member of at least one CIC. Further, Section 17 of CICRA stipulates that a CIC may seek and obtain credit information from its members (Credit Institution / CIC) only. The four CICs are:
- Credit Information Bureau (India) Limited.
- Equifax Credit Information Services Private Limited.
- Experian Credit Information Company of India Private Limited.
- CRIF High Mark Credit Information Services Private Limited.
Factors leading to Favorable Credit Score
- On time loan EMI payments.
- Regular payment of credit card bills.
- Paying credit card bills in full rather than paying minimum due amount every time.
- Avoiding over-leveraging.
- Maintaining strong financial records.
- Too Many forms of credit (such as unsecured person loans) among family members.
- Proper utilization of approved credit limit.
Factors leading to Negative Credit Score
- Too many credit report enquiries by banks and other institutions.
- Cheque bounces/dishonors.
- Irregular loan repayment.
- Defaulting on credit card bills/making late payments or consistent part payments.
- Too much unsecured credit such as multiple personal loans.
- Multiple applications for unsecured loan getting rejected.
- Defaulting as a guarantor.
- High utilization of approved credit limit or overshooting the limit.
- Errors in record by banks and other finance institutions.
Issues/Mistakes in credit scoring
Three common credit problems are:
- Lack of enough credit history.
- Denied credit application.
- Fraud and identity theft.
- Confusion of Names.
- Human Input Error.
Troubleshooting Credit Score
There are chances of mistake in arriving of credit score or mistaken identities creating confusion in the scoring process. Errors and inaccuracies are possible with Credit Information Report. The steps for seeking clarifications in your credit report are as follows:
- Contact the bank that declined a credit card or loan application on the basis of your poor credit score. Ask them for a clarification on the poor credit score and request them to provide the control number for your credit report.
- The bank will provide you with the control number of the credit report and also share the information on the credit report that is responsible for your poor credit score.
- Provisions are available on the website of the CICs for resolving disputes.
- The control number is a nine-digit unique number that helps to track an individual’s credit report from CIC’s database. The control number is generated when banks pull out your credit report on a requirement basis. The control number is a unique number, which is generated every time any bank or credit institution pulls out a credit report on you.
- CIC requires this number because it enables them to view the exact details that the bank has seen when they drew a report on you. Hence, it is important for you to request the bank to provide you the control number.
Read Also…
Types of ATM & Their Functions
TYPES OF CARDS