â€˜Past performance is no guarantee for future returns‘ â€“ is a disclaimer commonly used by various companies offering mutual funds and insurance. However, in case of your personal finances your past definitely holds the key to a better future.
Past performance is no guarantee for future returns – is a disclaimer commonly used by various companies offering mutual funds and insurance. However, in case of your personal finances your past definitely holds the key to a better future. Today your past financial history is an important benchmark and yardstick for financial institutions while deciding to lend out money.
Traditionally, when it came to spending - our fathers and forefathers, the concept of credit did not exist. However, today credit purchases are becoming the norm with enterprising and confident youngsters opting for immediate purchases on credit rather than waiting. So, while our fathers would have probably waited till the age of 50 to buy a house, today, the average age to purchase a house is around 30. As a result, credit penetration is gradually gaining momentum. Hence it is both imperative and worthwhile to understand credit scoring which will play pivotal role going forward for any form of credit. So if you are thinking of buying a house or your next car – it would make sense to review your credit score and know about the accompanied benefits or drawbacks.
Know about CIBIL
Credit Information Bureau India Limited (CIBIL) is India's first credit information bureau. It's a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its members in the form of credit information reports.
The 3-digit credit score is the numeric summary of your credit health, based on credit report information typically sourced from credit bureaus. If you have a good credit score, your application will undergo an eligibility check based on your CIR (which details your credit history).
The following illustration shows the impact of CIBIL Report and its benefits for you.
Importance of a credit score
Banks and credit card companies, use credit scores to evaluate credit worthiness. They use it to determine who qualifies for loan, at what interest rate and what credit limits. While banks are primary users of the credit score, it is not limited to banks only. Other organizations, such as mobile phone companies, insurance companies, prospective employers and government departments may employ the same techniques.
A three-digit number -- your credit score -- can determine whether you can do these things and even how much it will cost you. According to CIBIL, a score of 700-720 on a scale from 300 to 900 is an ideal credit score.
Maintaining a good score
Now that you know how important your credit score is - how does one ensure a good score or improve an existing one – it requires basic financial discipline and few simple practices. A sound credit history can be your most precious financial asset.
If your credit health shows that you were prudent and disciplined in paying off your debts, you will qualify for credit whenever you need it and you can also borrow money at a lower interest rate.
To start working towards a better credit score, you can begin with the following simple steps:
• Make sure you pay your EMIs on time for any loan taken or credit purchase. Being punctual with your payments will improve your score and future loan eligibility. You can use services of an online money management platform like MyUniverse (www.myuniverse.co.in) to keep track of your EMIs, bills and loans and reminds you of your due dates through timely alerts. From telephone bills to insurance premiums, you can set alerts for all kinds of payments.
• Put a limit on your credit card use and using it selectively and judiciously. Your credit score can be on the higher side by making less use of credit cards (relative to credit limit you have) and avoiding using many credit cards. With MyUniverse, you can set up auto-pay facility, a unique feature that automatically pays your bills based on the pre-set limit that you have for every biller.
Quick tips for to ensure good credit scoring:
- Pay your bills on time – Be alert with your bills and make sure you pay them off on time.
- Assign your credit card an upper limit – Putting a ceiling on your credit limit is wise and will ensure prudent credit card usage.
- Pay your EMIs on time – If you exercise punctuality with regards your current loan payments, your credit score is likely to inch its way up the scale.
- Maintain a healthy credit mix – Make sure your credit report is balanced and not lop-sided.
- Apply for credit in moderation – Apply for credit only when absolutely necessary to avoid coming across as credit hungry, a big minus on your report.
Benefits of a good score:
A healthy credit score should be part of our personal finance hygiene. As it has the potential to brighten or hamper our purchasing dreams. If you act with a plan, and follow a financial schedule, you can avail the following benefits as a result of a good credit score.
- Loans availability is easier and interest rate payable could be lower with a good credit score.
- You may get more and better repayment options (interest rate wise and otherwise). With a good credit score, you can actually negotiate with financial institutions and get a good deal.
- In some cases, it can also help you get better job offers.
- Home and auto insurers could decide on the coverage and premium being offered.
Knowing your credit score
You can also know your score from official website of CIBIL – just log onto www.cibil.com, and for a nominal fee you can request for your credit score report. There might be instances when you may find an error in the report – in such cases you can write to the credit information companies to rectify it. The law states that banks are given a 30-day timeframe to correct their records.
But the primary aim behind letting individuals view their reports is to help them understand their own financial history and work towards improving it.
It’s never too late – you can enhance your credit score and improve your report by following the advices mentioned above right away. And the results will be visible in the form of a better score soon.
The writer is a Head of Aditya Birla Money- My Universe.