Anuj walked into a bank to apply for a Personal Loan of Rs. 5 Lacs. To kick-start the process, the bank asked for multiple documents including salary slips, bank statements, residence and identification proofs (KYC documents). After 3 days, the bank rejected Anuj’s application and cited the reason of “low Credit Score on CIBIL”.
Today, Credit Score, pulled from any of the four Credit Bureaus – CIBIL, Experian, Equifax or CRIF – is the most important data piece that determines whether a loan application is approved or not. Any customer’s credit profile is determined using multiple parameters – both Financial and non-Financial – and the Credit Score from Bureaus is typically given the highest weightage. Hence, it is important for a customer to understand his/her Credit Score and other factors that define their Credit Profile.
There are various ways to improve Credit Profile and better manage one’s Loans, to ensure that the Credit Score is healthy and any of the future requests for loans is not rejected. Some of these ways are:
1. Paying your EMIs on time
It is important to pay all monthly installments on time. Any delay in payments significantly impacts the credit score. Banks, NBFCs and alternate lenders are required to report all loans and their payment status monthly to the Credit Bureaus. One should try and keep standing instructions or auto-debit of EMIs on their account within 3 days of salary credit, to ensure that all other expenses are driven out of the remaining money. This helps an individual to be more financially disciplined
2. Keeping Credit Card Expense to minimum
Credit Cards are a good financial instrument to finance short-term credit requirements but one needs to be careful while using them. Any delay in Credit Card payments leads to impact on Credit Profile and the interest rates on credit card dues are very high (3-4% per month, roughly 40% annually). Not just delay, even if you pay the minimum due on your credit card on time, a high utilization of credit limit leads to an inferior score. Hence, if one finds oneself in large Credit Card debt, one may consider taking a lower interest Personal Loan to pay off the credit card debt. This is a smart move to reduce the interest burden.
3. Small Ticket Consumer or Personal Loans
There could be situations where one has had a poor financial history and the Credit Score has dropped below 650. In these cases, one should consider taking a small ticket (Rs. 50K to Rs. 1.5 Lacs) Consumer or Personal Loan to slowly build credit profile by paying this loan on time. Improving a bad Credit Score is a gradual process but can be achieved using a carefully-used Credit Card or Personal Loan.
4. Avoiding multiple Loan Applications
Any loan application to a lender, be it a Bank, NBFC or alternate lender like Qbera, would lead to an inquiry on the Credit Bureau, for the lender to pull your Credit Score and Report. If you make multiple loan applications in a short period of time, your Credit Score can get adversely impacted. It is important to carefully choose the lender and apply only to an institution where the chances of approval are the highest.
5. Closure/Settlement of Loans
One may be tempted to settle a pending or overdue loan for a smaller block amount, but any such settlement also impacts the Credit Profile, even though the loan is closed. It is important to get such loans restructured and pay on time. Also, closing credit card accounts could also lead to drop in credit score for some time since the total limit available drops but the total outstanding balance on other loans remains the same, thereby leading to an artificial increase in utilization. So, one should never close multiple loan accounts or credit cards within a very short period.
So, checking one’s Credit Score regularly is very important for a consumer before applying for a loan to avoid any surprises. One can instantly check their Credit Score online by making a payment and answering few questions on the Credit Bureau websites. For more information on Credit Scores and interpreting Credit Reports, do follow Qbera . We would cover that in our subsequent post.