Expert advice

Oct 23, 2013,16.59 IST

Impact of your credit score on financial planning

Nitin Vyakaranam

Understanding the growing importance of credit score is imperative to the success of financial planning. Financial planning is effective if one is able to utilize the available resources to the optimum level. As sources of income alone cannot always suffice the requirement of funding one has to look at alternatives of credit.

Bargaining for the best cost of funding is as important as getting the maximum return for a given level of risk for one’s savings. A person looking for credit can obtain lending at a competitive rate if he/she has a good credit score. Here is an understanding of 5 important issues regarding one’s credit score that can help a person accessing credit:-

1. What is a credit score and how important is it?

A credit score is 3 digit numeric value, ranging between 300 &900 assigned to a person based on their past credit history. A person with higher credit score has brighter chances of availing credit as lenders are more comfortable in processing their loan application.

A lower credit score can lead to denial of loan application. Even if a bank is willing to lend to person with lower credit score, it will be at higher rate of interest. This is known as risk-based price adjustment practice of lenders.

2.  Who maintains credit score information in India?

Credit Information Bureau of India Ltd (CIBIL) in association with Transunion maintains the credit score of individuals and companies.

3. How can one access this score?

Individuals can access their credit reports directly from CIBIL. The credit score is given in a report popularly known as Credit Information Report (CIR). If a person is looking to avail credit then first trying to find their credit score can be a beneficial step. If a person has good score and installment repayment ability, then they stand at an advantage to negotiate with banks for a better interest rate.

4. How can one maintain a good credit history?

By following outlined steps one can enhance their score or maintain a clean credit history which is imperative to access credit and bargain for a good rate of interest.

  • Pay dues like EMI/ Credit card bills before the due date
  • Try to use less than thirty percent of total available credit for non-secured loans like personal loan and credit cards
  • Too many credit cards with outstanding balances can be perceived as risky and impact the chances of approval of loan.The loan portfolio of a person should be a healthy mix of credit like home loan, vehicle loan and credit cards (ideally one or two).
  • Consider before closing credit cards as old credit cards imply the longevity of relationship that a person has maintained with a bank or credit card issuer. While overusing a credit card can impact one’s credit history negatively, having a credit card which is not used can be viewed as financial security.
  • One is responsible equally for joint accounts and add-on credit cards. So monitor them periodically to see if there is any default payment and make corrections when necessary.
  • Try not to apply for credit that is not required as each application triggers a credit enquiry from the lender and impacts the credit score negatively.
  • Review own credit history at least annually for any lapses which can be corrected.

Unlike past, these days a person’s credit history is linked through Unique Identification ID’s and PAN accounts. Financial information pertaining to a person’s credit is accessible to prospective lenders. In current scenarios understanding and maintaining a good credit history can aid in their future financial planning process.

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