Now, a healthy credit score can fetch you more benefits

When Bengaluru-based media professional Rajshekhar Burujupati lost his job in 2008, he had difficulties in repaying his credit card and personal loans. This impacted his credit score. And he realised it as late as January this year, when his application for a personal loan got rejected.

“I had settled two credit cards and one personal loan. But I could not close one personal loan as I was unable to contact the bank and work out a settlement. That impacted my credit score and I was not able to get a new loan even 10 years later,”he said.

Burujupati then approached CreditMantri, a credit management service provider, which helped close the pending loan. Since then, his score has improved and his loan application was approved.

So how does a good credit score help?

Today, credit scores are important for not just getting a loan, but even for getting better loan rates. Lenders have been relying on credit scores for fixing the rate in case of personal loans for some time now. Of late, banks have started offering customers with good credit scores better home loan rates too. Lenders that offer preferential pricing in home loans to customers with a good Cibil score are Bank of Baroda, Bank of India and IDBI Bank. Cibil, or Credit Information Bureau (India) Ltd, is country’s oldest credit bureau.

“While consumers can use their credit score to leverage discounts in the home loans and personal loans space, Bank of Baroda has also announced score-based discounts across all retail loans, except education loans. These consumer-centric offers do not only reward credit-consciousness but are translating into tangible cost-savings that consumers are eager to avail of,” said Cibil’s head of direct to consumers interactive, Hrushikesh Mehta.

According to R Sudarshan, co-founder, CreditMantri, benefits of good credit scores other than better loan rates are better service or offer of a top-up loan to your existing loan. It also becomes easier to port to another lender if you have a good credit score.

Banks also work closely with credit bureaus to educate customers about the importance of having a good credit score, said Arvind Kapil, country head -unsecured, home, mortgage and working capital loans, HDFC Bank. “Customers also understand the importance of bureau. It is a self-check model,’’ he said.

Reasons for poor credit score

The most important factor that will either improve or worsen your credit score and history is timely repayment, said Vaishali Kasture, MD, Experian. “Overall there are several variables that go into calculating the score of a consumer, such as, the number of lines the consumer has, how recent his trades are, how has his repayment history been over the last several years, does he have a one-off loan or does he have multiple lines of credit, etc. But what is significant is timely payment,’’ she said.

Maintaining a good credit score essentially means you have consistency and discipline in financial transactions. Assume that you fail to pay one installment on time or don’t pay it at all. Even if you make up that payment in the following month, the bank will first deduct the charges for the late payment from your installment. Since most installments are either automated or paid through post-dated cheques, every subsequent month it will show that you have paid a lower amount.

“Over a period of time, this is likely to build up. The customer will end up missing a payment and fall short of what is due to the bank. That is why we find some customers on a chronically one-month missed payment cycle throughout their payment cycle,” Sudarshan explained.

Checking or applying for too many loans will also adversely affect your credit behaviour. Every time you apply for a loan, the lender approaches the bureau and it gets recorded. This reflects as credit hungry behaviour.

“Be thoughtful in your behaviour and don’t apply to, say, 10 different lenders. Be selective and go to just two or three places. Check the interest rates and then apply for the loan,’’ Kasture warned.

How to improve credit scores

If you are looking to rebuild your credit history, the best way is to take either a credit card or a small loan and be consistent with your payments. Remember that you have to pay on time, month-after-month and within the due date.

The magic will not happen overnight. But it will start reflecting in your credit record over time. Your tenure is as important as how recent your repayment is. While it is difficult to say how many years are relevant, the last couple of years are definitely more relevant in the credit history and score,’’ Kasture said.

Timely repayment of the loan, leverage that you are building up, utilisation on your credit lines and overall tenure of the credit are the important factors one should bear in mind to build a credit history responsibly.

Specialised products

For someone with a bad credit history, getting a loan, even if it is a small amount, could be difficult. There are products in the market that you can use to rebuild your credit score. For instance, some banks offer credit cards against fixed deposits. The limit will be the same as the amount in the FD. Use the credit card like a normal credit card and repay it regularly. Once you build a build a track record of consistent repayment over six months to a year, your credit history could start improving.

“To build credit history you need not take high-ticket loans. The quantum of loan does not matter. You could take a two-wheeler loan or a consumer durable loan. The lender is not testing for ability, but your intent to repay,’’Sudarshan said.

There are lenders who offer specific bridge loans for such purpose. Credit Sudhaar, an online finance and credit platform, is one such lender. Arun Ramamurthy, co-founder, Credit Sudhaar, said, “We are a non-banking finance company and we lend to customers who have made mistakes in the past and to whom banks will not lend. We don’t lend to everyone. We do psychometric scoring and look at social data. There is enhanced due diligence as we have to be doubly careful. In about six to 10 months customers can resurrect their credit profile,’’ he said.

STARTING AFRESH

• Repay all pending old loans, credit card dues in full
   
• Take a small loan like or a secured credit card
   
• Pay all EMIs in full and on time
   
• Pay regularly and consistently; don’t be in hurry to repay the loan
   
• Maintain a healthy mix of secured (home loan, auto loan) and unsecured loans (personal loan, credit cards)
   
• Monitor any co-signed, guaranteed and joint accounts regularly to avoid negative impact on your score due to others’ negligence

KEEP IN MIND

• Even a single missed payment could spiral into chronic default
   
• A recent loan being repaid consistently has better impact on credit score

700-760
The Cibil score above which banks offer cheaper home loans