Things that can affect your credit score in India

Things that can affect your credit score in India

Roboadviso     Mutual Funds     Posted On, Mon 20th August, 2018     No comments

The financial life of all individuals is directly affected by their credit score. The creditworthiness of all is determined by the credit score. It is what helps lenders ascertain whether or not a person meets the requirements for getting a credit card or a loan. A higher credit score is an indicator of reduced default risk, while a lower credit score suggests greater default risk.

According to CIBIL, the credit score falls between 300 and 900. A credit score of 750 and above is considered good and is associated with faster approvals of credits and loans.

Listed below are different things or factors that can affect your credit score.

  1. The credit utilization ratio

Credit utilisation ratio refers to the credit amount used by a burrower against the total credit available to him/her. It is calculated in terms of percentage. For example, if the limit on a credit card is INR 50,000 and the card holder has used INR 20,000, then the credit utilisation ratio is 40 percent.

The calculation of the ratio is done as per the total amount of credit that is available to a person on the sum of all the cards held by the person. Thus, if an individual has 3 credit cards, with respective credit limits of INR 1 lakh, INR 2 lakhs, and INR 3 lakhs, and the total credit used by the holder on all of the cards combined amounts to INR 1 lakh, then in this case the credit utilization ratio will be 16.66 percent. { (1lakh/6 lakhs) * 100 }.

Credit card companies and lender prefer customers with a credit utilization ratio of not more than 40 percent of the total credit limit. Thus, it can be said that credit worthiness of a person will be higher when the credit utilization ratio is lower, and vice versa. Avoidance of excessive use of the credit limit and regular credit card bill payments can help better the credit utilization ratio.


  1. Do not miss bill payment due dates

Non-payment of the EMIs (equated monthly installments) on time and/or missing payment of credit card bills on or before the due date have an adverse effect on the credit history of the burrower. Missing even one single EMI or bill payment gets reflected in the credit report. The report will have the total number of days that the bill or EMI was not paid after the due date.

Currently, in India, only EMIs/loans and credit card bills are taken into consideration when assessing the credit history. Other household payments are not taken into account. Western countries factor in payments of varied bills like mobile bills, utility bills, etc., when calculating a person’s credit score. This is not done by the credit bureau agencies in India.

Burrowers need to pay their credit card bills and EMIs on time in case they have low credit scores due to late payments. After regular on-time payments of the bills have started, the credit history will improve in 6 to 8 months.

  1. The EMI-to-Income Ratio

Burrowers also need to take into account the EMI-to-Income Ratio which gets calculated according to the credit card bill and loan payments divided by the total earnings. The salary used in the calculation is not the gross total income, but the take home income.

Thus, if the monthly salary of a person is INR 60,000 and the monthly EMI outflow is INR 20,000, then the EMI-to-income ratio is 33.33 percent. Lenders prefer a maximum EMI-to-income ratio of less than 50 percent, because the natural assumption is that half the income is needed for living costs.

Applications for any extra loans will get approved by lenders on the basis of the applicant’s capacity to carry the new EMI load. Thus, in the above example, the additional EMI amount that can be borne by a burrower would be (50 percent -33.33 percent) 16.67 percent. The lender will approve the loan amount after factoring in the current interest rates, etc.

  1. Apply for a new loan after reading the credit report

As stated above, the lenders ascertain the credit risk of a burrower by checking his/her credit score. If the credit score is low, then the burrower may be charged a higher rate of interest, or the banks may not sanction the loan. It is therefore essential to check the credit report before applying for a new loan.

In case the credit score is low, then it needs to be improved. Improvement and correction of the credit report may take 1 to 2 months or more. Hence, people who are thinking of taking out a new loan have to check their credit history 2 to 3 months before actually applying. This will help give you the time to improve and correct the report, if needed.

  1. Avoid frequent increases in credit cards’ limit

A higher credit limit on credit cards allows cardholders more flexibility with regards to using more debt. Such increased credit limit however has to be used carefully else it can have an adverse impact on the credit score.

Banks usually assess the net worth of an applicant before approving a loan. When one raises the credit limit on credit cards on a regular basis, then lenders may interpret it as a sign of increased dependency on credit for management of expenses. This is regarded as a red flag by lenders.

  1. Ensure that the credit report is devoid of clerical/reporting errors

It is important for all individuals to regularly check their credit report and verify whether or not it has mistakes that can adversely impact the credit score. Experts state that people need to check their credit report, once a month or once every quarter. This helps in remaining updated about the credit report and improving it with responsible financial and credit prudence.

Some types of errors that may be present in the credit report include incorrectly spelt name, wrong payment default note, etc. All errors on the credit report can be corrected by logging onto the website of credit bureaus or by mailing them a filled ‘dispute resolution form.’

  1. Ensure that all previous loans are marked as ‘closed’ and not as ‘settled’

Any kind of default on previous older loans gets reflected in a burrower’s credit history. Such defaults adversely impact the creditworthiness and credit score. It is important for you to correct any mention of a payment default on the credit report and ensure that the status of the old loan is marked as ‘closed.’ You also need to get an official certificate of closure of the loan from the bank/lender.

Taking up an offer of a partial or one-time settlement of an old loan account lowers the credit score. Settlement of an account is an indicator of the fact that the lender agreed to take a payment that was lesser than the money owed by the burrower to the bank. A settlement means that the bank took on a loss and hence the ‘settled’ status is entered into the credit report. This status is often regarded as being bad and unfavorable to sanction of new loans in the future.

Taking up an offer of settlement is indicative of a burrower’s inability in repaying the debt. It is vital for individuals to avoid settlement of loan accounts as they get reported to the credit bureaus who then reflect the ‘settled’ status in the credit report of the burrowers.

When a loan account has a ‘closed’ status in the credit report, it is indicative of the fact that the burrower repaid the loan in full to the lender. This ensures that the credit score remains healthy.

  1. Lack of a credit history

Lack of a credit history can negatively affect the credit score. The credit score is calculated on the basis of varied factors like credit behavior, history of loan repayments, and credit utilization ratio, etc. When there is no history of an old loan or use of credit cards, then lenders tend to find it hard to ascertain a burrower’s credit risk.

Not using credit cards and not taking loans will result in no credit score and lenders will regard the burrower to be new to credit. Since there is no credit score, banks will look at other factors such as job, salary, etc. to ascertain the capacity of the burrower to repay.

A good credit history increases the chances of getting a loan sanctioned. It is also important to note that many banks and lenders have now begun looking at credit scores of individuals when determining the rate of interest. Thus, a good credit history and higher credit score can help avail of cheaper credit and loans.

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