The good news is that many banks, public and private, have recently cut their lending rates in response to RBI’s monetary policy stance. Does this mean that loans, even credit cards, are easily available now? Unfortunately, no. In fact, most banks have clamped down on consumer lending and reduced credit as well as cash limits. Penalty fees and add-on charges, meanwhile, are shooting up faster than the mercury.
There is, however, a silver lining among the dark credit clouds. With three new credit bureaus setting up shop alongside CIBIL, banks will be able to assess the credit worthiness of a borrower in a better manner and, over time, introduce differential pricing to reward good borrowers. As far as you are concerned, it boils down to a three-digit number between 300 and 900—your credit score (see Score Better Credit, 14 May). So, if you play your ‘credit’ cards right, you can be in a position to negotiate with your bank to land a loan or card, never mind the brouhaha about slowing credit growth.
How can you better your credit score when you don’t have access to it and, therefore, have no way of monitoring it? The answer lies in improving your credit habits. Here are five strategies that are guaranteed to polish up your record.
Pay on time: A single late payment will reduce your score by around 50 points. So not only will you end up paying the mandatory bank penalty, but also thousands of rupees by way of a higher interest rate on the next loan or credit card you seek. A missed payment, one that is over 30 days overdue, on the other hand, will easily shave off 100 points, taking you down to a lower score range.
A missed payment, say, two years ago, will show up in your credit report, but the impact is likely to be 10 times worse if you have defaulted in the past few months. In case your repayment capacity has taken a beating, ask your lender how you can manage the debt better before giving in to the urge to revolve credit. Unfortunately, a majority of Indians are guilty of this, more so in the face of salary freezes and job losses. If you routinely pay the minimum amount instead of the entire amount that is due, you will be chalked up as a high-risk borrower. This can result in a cut in your credit limit, which, in turn, will dent your score because of the resulting higher debt ratio. If you can’t pay the full amount, consider paying at least 50% to keep your credit score intact.
You can also take a chance on a late payment if you can drum up the entire bill amount within a day or two of the due date. If you have been diligent with your bills, you can write to your bank and, more often than not, it will overlook the transgression. It will also not show up in your credit report. The best way to ensure timely payments, however, is to sign up for the ECS facility, where the due amount is automatically debited from your bank account on a specified date.
Keep balances low: You can add about 100 points to your score if you restrict card usage to around 15-20% of your credit limit. Your credit score will take a beating if you are prone to maxing out your cards, irrespective of your repayment history. Says one expert: “Many recommend transferring the balance from a maxed-out card to less-used ones to even out the usage. This does nothing for your score as it does not affect your total outstanding debt.” A corollary is to avoid taking new cards just to increase your available credit. Instead, request the card issuers to hike your credit limit. As your debt ratio decreases, your scores go up.
Build credit history: As per new regulations, banks will not sanction a loan unless you already have one ‘track’ running. A track refers to either a credit card or an existing loan, which showcases your bill payment record. A 15-year-old ‘track’ can add 25 points to your score. Most credit bureaus insist on at least 10 years of positive account history to be eligible for the highest score tier. So if you are considering closing down unused accounts, start with the newest ones. Remember that banks will deactivate unused accounts and cards. So notch up a couple of transactions every six months and pay the bill on time to keep your tracks active.
Avoid new accounts: All new applications show up as inquiries on your report and too many inquiries signal a desperation for credit. Anything from 3 to 25 points can be deducted from your score depending on the number and nature of the inquiries and the overall health of your report. If you pick up cards the way your pet picks up fleas, your score is likely to take a beating with every inquiry. A new account will also lower your average account age and, if your credit file is thin, it will lower your score by as much as 100 points.
Try piggybacking: This refers to using another person’s good credit history as a way of building your own. For example, if you add your son to your credit card as an authorised user, or open joint accounts, he instantly earns a credit history and adds 20-40 points to his credit score.
However, a credit score is not the only determining factor. There are other variables, such as educational background and previous banking relationships, that come into play. For instance, an IIM graduate’s tendency to revolve credit is less likely to be considered a sign of financial distress. In the West, banks are also considering supplemental details like phone payment history and property deeds. The new credit bureaus in India may follow this trend, so polish up those records too.