With the Reserve Bank of India (RBI) slashing the policy rate to just 4 per cent in 2020, banks have lowered the interest rates charged on various retail loans — personal, vehicle and home loans — in the last few months.

Yet, many of you, especially the first-time borrowers, may not get the best rate in the market. A common reason for this is your low credit score.

A credit score represents the creditworthiness of an individual, typically assessed by external agencies or credit bureaus. In India, the RBI has licensed four such credit information companies — CIBIL, Experian, Equifax and CRIF High Mark.

The CIBIL score — the most widely used one — for instance, ranges between 300 and 900, in increasing order of one’s creditworthiness.

Borrowers with a CIBIL score of 750 and above are usually offered the most competitive rates by banks. For individuals, whose score is lower than 750, banks charge higher spreads, after considering other factors such as the size and the type of the loan. For instance, SBI charges an interest rate of 3 per cent over the two-year MCLR from a borrower with CIBIL score of 757 and above for loans availed under SBI Car Loan Lite Scheme (a fixed-rate auto loan). Under the same scheme, borrowers with scores ranging between 689 and 756 will be charged a rate of 4 per cent over the two-year MCLR. Some banks might outrightly reject a loan applications because of the poor credit score of the borrower.

While it is a no brainer that borrowers with irregularities in repayment of EMIs or credit card bills would suffer from a lower credit score, the first-time borrowers are not better off either.

No credit history

A borrower who has not availed of any credit in the past would get a credit score of less than 750 only. In some cases, the score may also be reported as ‘NA’ or ‘NH’, indicating that the borrower does not have sufficient credit history and is viewed negatively by lenders.

This is because having a credit history enables a lender to assess your repayment capabilities by determining whether you have managed your credit responsibly in the past. Besides, your credit history helps lenders to assess your ability to service any additional debt that you may require.

In the absence of any such reference to check the payment track record, the lender will have to rely on other factors such as income and demographics to evaluate the creditworthiness. Hence, CIBIL gives such borrowers a low score, implying the need for further due diligence by the lender.

The CIBIL score tracks payment records of the past 24-36 months. Ideally, one should have a minimum credit history of at least six months as on the date of generation of your credit report for a better score.

Frequent loan enquiries

Even if you haven’t taken any loan till now, if you have reached out to multiple bankers to check the best deal available for you, it may work against you. CIBIL captures information on the loan enquiries made by you in the last seven years. Each of your loan application would have in turn triggered a hard credit enquiry by the lender. Multiple hard enquiries in a short span of time reflects a behaviour of seeking excessive credit. Rejected loan applications also impact your credit score.

However, one must remember that when you check your score for your own understanding, it is just considered as a ‘soft inquiry’ and has no impact on your credit score. You can check your CIBIL score by providing details of your PAN card and email ID, on CIBIL’s website.

Mind your limits

If you have now decided to take a credit card, in a bid to improve your credit score, be mindful of your credit spends. Any increase in the outsanding balance of your credit card, or an increase in the number of cards, is viewed as an increase in repayment burden and may negatively impact your credit score.

Besides, your detailed CIBIL credit report also reflects the highest amount ever billed (including interest and fees) for a particular credit card or overdraft facility.

That apart, while evaluating your current loan mix, CIBIL views unsecured debt obligations negatively (juxtaposed to secured debt such as home loans etc. that help build long-term appreciating assets).

To keep your credit score in check, avoid taking up multiple credit cards, and try to limit your credit utilisation within the 30 per cent of your credit limit, unless required.

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Published on January 16, 2021