Recently, a young friend of mine, who’s earning Rs 1 lakh a month was shocked to find that banks were not enthusiastic about giving her a car loan. She was earning good money, saving quite a bit, had a spotless track record when it came to never taking a loan. So, wasn’t she the ideal borrower? Well, the lenders didn’t think so because she had no credit score. In India, you cannot get a retail loan without a credit score.  

This is a chicken and egg problem because, if you’ve never borrowed, you will not have a credit score. And if you don’t have a score, you cannot borrow. In this episode of Question of Money, let me tell you how you can get a credit score and maintain it at a high level.  

Getting a credit score  

To get credit bureaus to open your khata, you need to show that you can borrow and repay on time.  No lender will give you a car loan, personal loan or housing loan without a credit score. But if you are a person with regular income, like friend, the bank where you have your salary account will easily give you a credit card on applying. You may get a low credit limit and may need to pay an annual fee, but that’s okay.  Once you get the card, you need to swipe it regularly – but not excessively. Then pay your monthly dues in full for several months. After 6-8 months, you’ll find that you have a credit score. You need not do anything else to get this score.  

Whenever any individual in India takes a loan, the lender is required by law to report the loan taken and the repayment history to credit bureaus. These bureaus compile this information and assign you a credit score.  India currently has four credit bureaus – TransUnion CIBIL, Experian, Equifax and CRIF High Mark and your records will automatically go to all of them.  

What’s a good credit score? 

The lowest credit score you can get is 300, the best is 900. Hardly anyone gets to 900, so you should consider any score above 800 as good enough. Generally, lenders consider scores above 750 to be very good and offer you good terms. Scores of 650-750 are decent and will be enough to get you a loan.  

Credit bureaus give you a higher score if you have a history of repaying a variety of loans over a long period of time. While this doesn’t mean that you go around taking loans all over the place, do try to retain and keep using your oldest credit cards, so that you can build a repayment history over time.  

Do note that credit bureaus do not have any obligation to write to you sharing the credit score. To know you score, you will need to sign up with the credit bureau and access your score. Credit bureaus are supposed to let you access your credit report once a year, free of cost. But you usually get only a bare bones report. If you want to track your score regularly or see what is leading to it going up or down, you will have to take a paid subscription.  

What can cause your credit score to fall? There can four triggers.  

Missing or delaying a repayment beyond its due date. If you skip an EMI or even choose to pay only the minimum amount on your credit card bill, instead of the full amount, your credit score will take a hit.  

If you take too many loans in parallel, the credit bureau can take this as a sign that you are in distress and mark down your score. Two or three loans at once may be okay, but not many more beyond that. So it is always better to apply for new loans after closing old ones.   

When you take personal loans, loans against shares or mutual funds or a credit card, the bank or lender grants you a credit limit, the total amount your can borrow. Now, credit bureaus also track utilisation of this credit limit closely. If you use up too much of your credit limit, that’s a black mark against you. To maintain a good credit score, it may help to apply for liberal limits but use them sparingly.  

Lately, though, many folks are finding their credit score slipping even though they have not taken any new loans or delayed repayments on old ones. This could be a case of wrong data going to credit bureaus or outright fraud. Sometimes, you may have repaid a loan, but the lender has not reported it on time to the credit bureau. Loans you have closed out may not be reflecting in the credit bureau’s records.  

But the more dangerous cases are those of identity theft, where someone has used your KYC documents like PAN or Aadhar to take a loan in your name. This is why it is important to keep track of your credit score. If you find a sudden slippage, check your report and approach the credit bureau’s dispute resolution process to correct it. 

(Host: Aarati Krishnan, Producer & Edits: Anjana PV, Camera: Bijoy Ghosh & Siddharth Mathew Cherian)