What is credit health?
It is a common practice these days to go for a complete health check up quarterly or half yearly. But have you ever considered checking up your credit health? Being physically and mentally sound is no wonder a prerequisite for a happy life.
But, at the same time, it will be only foolish to overlook you credit health especially at a time when credit plays a very important role while taking major decisions like buying a house or a car. You have to be equally vigilant - in fact do your best to maintain a satisfactory health of your credit life just like you would do for your own health.
The need for a well planned credit health strategy might not seem very significant at first glance. However, its importance will surface when you have to avail loans, credit cards, account opening and all other kinds of credit facilities.
But firstly, you have to know that a credit score speaks volumes about your character and your capacity. That is why it is implicitly agreed that these two attributions are the two most important C's of credit health. If you are responsible in handling your finances, it automatically reflects on your credit report and vice versa.
You credit score is collated by credit bureaus like Cibil and Equifax and they gather your credit data using both qualitative and quantitative measures. Quantitatively, it is basically the data furnishers like the banks, credit card companies with whom you have had a history of financial transaction.
And qualitatively, it is the subjective factors mainly - Character, Capacity, Capital, Collateral and Conditions. Through these two assessment techniques, credit bureaus can collect all your information that they need to prepare your credit report. Hence, you can see that a lot depends on your history of loan repayments and defaults, credit card bills, etc.
A credit score is based on algorithm used by a credit information company. It is a 3 digit number between 300 and 900 points. Credit score is based on your credit history and tells the lender how likely you are to repay a loan or credit card dues.
Having a credit score of 750 and above will make you part of an elite club which gets special treatment when it comes to deciding what job you should get, what should be the EMI for your insurance and loan, what should be the interest rate on your loan, your marriage eligibility, phone number eligibility and limit and much more.
Earlier credit scores were assigned only to those who had taken loans, but now even those who have never taken a loan can get a credit score.
Impact of bad credit score
So in effect, a bad credit score affects a lot more than your ability to borrow money or get credit on favorable terms. Usually people with bad credit score are denied loans and even if some lender decides to give loan, then it will be at a high interest rate.
It can affect your chances of getting a job, what you pay for insurance and even your personal relationships. Well, it may not affect much if you are applying for an entry level position.
But if you are going to going to be posted where you need to handle cash and overlook the financial aspect of the company, you will surely have to give your potential employers the right to go through your credit report because, if you don't then it obviously gives a wrong impression.
Past behaviour can be used by landlords to check on a potential tenant's credentials. This would seek to gate those people who might not pay future rentals or worse, still, just "occupy" the flat illegally.
Insurance companies can use past track record to decide on the insurance premia while granting policies. General insurers in India have started accessing their credit history database. The usage is currently restricted to contacting policyholders who may have shifted residences for follow-ups or premium reminders. However, the scope could further widen in the future.
As mentioned earlier, those with poor credit history may find it difficult to buy an insurance policy. It could also determine the premium you have to pay on motor or even health insurance policy - a practice that already exists in developed economies. The rationale is that a financially disciplined individual is likely to be a safe driver and a less of a threat to himself or the vehicle.
Your chances of a big fat Indian wedding may also go for a toss if you have a poor credit score. Prospective brides/grooms may check on the past track record of their prospective spouses to check on their credit worthiness before they tie the knot!
Telecom companies determine give out a new connection also on the basis of your credit score. Poor credit score may affect your chances of getting a number from the telecom company. And if you do get it, then your limit will be significantly reduced.
How to improve it?
It is important to keep a check on your credit score to enjoy sound financial health and goodwill. There are many ways of improving your credit score.
1) Check Your Credit Report:
Credit score repair begins with your credit report. Thus, the first thing to do is to request a free copy of your credit report and check it for errors. In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your accounts is correct.
2) Regular payment of bills:
Your payment history on your credit health report amounts to almost 35% of your total score. Prevention is better than cure; therefore, it is important to be consistent with payment of utility bills.
3) Pay off a debt:
Even if the debt amount is small, it is essential to get rid of it. Minimisation of outstanding debt helps to improve the credit score.
4) Less credit cards and less use:
Bad credit scores can be improved by reducing the use of credit cards as well as avoiding having too many credit cards. The ideal thing would be to use 10-20% or less of the total credit available.
5) No credit card default:
You should try to keep the balance due of each credit card at least 30% below the credit limit. It is advisable to first clear dues of credit cards close to credit limit.
6) On time payment of EMIs
For people trying to improve their credit score, it is important to pay EMI on time. If you are punctual with current loan payments, it will improve your credit score.
7) Don't close unused credit card accounts:
A closed account will still show up on your credit report, and may be considered by the company. Also, canceling a credit card can lower the credit score. A better strategy is to occasionally use older credit cards so the issuer doesn't stop reporting to the credit bureaus.
8) No new credit card purchases:
New card purchase will raise the credit utilisation, which is the ratio between credit card balances and credit limit. The higher the balance, the more it affects credit score. Lowering balances helps improve credit score.
Mr. Arun Ramamurthy is the co-founder of Credit Sudhaar.
If you have tried your hand at fixing your credit report but have failed to attain desired results, you can always take help of credit health management companies like www.creditsudhaar.com to improve credit score.