Manish, a software engineer residing in Delhi wanted to take a personal loan for his marriage. He has a good salary, works in one of the top companies and has enough work experience. He applied for a personal loan with his banker for Rs.5 lakhs with whom he has had a long relationship. Manish thought he will get a great loan offer of 12% interest with tenure of 5 years from his bank, but what happened was the exact opposite.
The bank came back with an offer that had an increased interest rate of 19% and the tenure too was only 3 years. A shocked Mahesh asked the bank representative why he is getting such an offer, for which the banker replied that one of the major reason was Manish’s low credit score.
Manish immediately applied for his credit report and found that his score has dropped due to a couple of late payments on his credit card some 2 years before. This is when Manish understood the importance of credit score and started researching on credit score – what is a good credit score, factors that affect credit score and how to improve your credit score.
Yes, this could happen to any of you, in fact on checking your credit score you might wonder; why is your credit score low and what are the far-reaching implications of the same. Let us illustrate the importance of a good credit score through Manish’s story.
What is a good credit score?
On further investigation, Manish learned that there are 4 credit bureaus operating in India namely Equifax, CIBILTM, Experian and CRIF High Mark which collect the credit data about a person from all the lenders which they use to analyze and derive an individual’s credit score.
Now, the credit bureaus have been asked by the RBI to make available credit score for individuals for free once a year; and on checking the same you would find that your score could vary. But don’t worry, these variations are due to the internal calculations by the bureau. But you should be worried if your score is low.
In India, banks consider a score of 700 and above a good credit score. The ideal score is one above 750. So, if you are looking to negotiate good terms on your loan it is best to have a score above 750. On the other hand, any score below 650 would attract a higher interest rate. Banks will take a stand and not negotiate to reduce the interest rate.
Reasons why your credit score drops
Manish found that there are many reasons why a person’s credit score could drop. Some of the major reasons are
1. Late payments: A person misses on paying their EMI or credit card due credit scores will drop.
2. Credit utilization: Even though you pay your credit card bills on time and in full, maxing your credit limit is a sign of credit hungriness and mismanagement. This could lead to lower credit score.
3. Looking for a lot of credit: When you apply for credit the lender will pull your credit score. Due to this there will be a slight drop in the score. If you apply for credit with multiple lenders they will all check your credit score and the drop-in score will be very high.
4. Mistakes in credit report: If there are any mistakes in your credit report the mapping of data might not happen. This could result in wrong credit score.
5. Loss of old credit: Once a credit account like a credit card is closed it will be removed from your credit report after some time. Due to the loss of these accounts there is a chance your credit score will drop.
6. Late updates by lender: Your lender might not have updated credit bureaus on your payments or is late in doing so. This could lead to your credit score not being updated.
How to improve your credit score?
But there is help at hand for people like Manish, who wish to improve their credit worthiness. The credit improvement service (link) which help them to
1. Rectify mistakes on credit reports
2. Help get score building loans and credit cards
3. Provide quarterly credit score updates to help monitor the efforts put into improving credit score
After doing his due diligence Manish realized that the next step for him is to improve his credit score before applying for loan again. Also, he took a vow to check his credit scores regularly and never be in such a position.