800: The magic credit score and how to get it

If you’re able to hold on to a credit card or a loan for many years, it reflects your creditworthiness.

A good score helps your lenders recognise your high creditworthiness. A credit score of 750 or more will get you some of the best loan and credit card offers.

Cheap financing, which a good credit score can get you, goes a long way in bringing down the costs you incur towards the financing of various aspirations, such as owning a home or upgrading your car. On the other hand, a low score means you’ll have to pay a high rate of interest on your borrowings. In the more extreme cases where a borrower has defaults and loan settlements against their name, few lenders would want to give them a loan.

For example, a large government bank charges someone with a score of 800 a rate of 8.50 percent on a loans? A good credit score helps" target="_blank">home loan. On a 20-year loan of Rs 50 lakh, the interest is Rs 54.13 lakh. The same lender charges someone with no credit score 8.80 percent and the interest works out to Rs 56.42 lakh. Someone with a bad score—let’s say 600—pays 9.65 percent, and the interest works out to Rs 63.03 lakh.

Since a subprime borrower will pay more interest, a bad score can limit the achievement of other financial goals, such as saving for retirement or children’s education.

Therefore, a good score—preferably one over 800—is desirable. Getting financing becomes easier. With that comes the fulfilment of aspirations. Let’s look at how to get and maintain a credit score of 800.

The first rule - Always pay on time

The only thing that guarantees a high score all the time is timely repayment of equated monthly instalments (EMIs) and credit card dues. Never be late. If you have trouble keeping track of your bill payments, automate them through netbanking or an Electronic Clearance Service (ECS) mandate. Let me tell you the story of Syed, whose score fell from the 840s to the 720s with just one missed credit card payment. While abroad, Syed couldn’t access the credit card payment gateway on the due date. Though he returned to India to settle the dues along with the penalty and interest, his score fell to 776 after a month. Despite the payment, his score fell to 727 the following month. It took months of responsible credit card use and timely payments for Syed to get his score back above 800.

Keep your utilisation low

Utilisation refers to the percentage of your credit limit that is used in a month. For example, your credit card has a limit of Rs 1 lakh but you’ve spent only Rs 10,000 in a month, which makes your utilisation ratio 10 percent. The higher your utilisation, the greater the negative impact on your score. This is also a little complex because high utilisation, when done with full and timely payment, has limited bearing on your credit score. Experts recommend staying under 30 percent. But if you’re repaying your dues without fail in the same month, higher utilisation may not hurt. What hurts is paying the minimum dues and rolling your dues over to the next month.

Don’t be MAD

One of the worst things you can do to your own finances—and thereby your credit score—is pay just the minimum amount due (MAD) on your credit card. While the MAD saves you from penalties, it doesn’t save you from the high interest costs of unsecured debt. Most cards will charge you 2.5-4 percent a month on your dues. This works out to an annualised rate of 30-50 percent. Unless you’re going through a crisis that prevents you from repaying your dues, never settle for MAD. Repay your dues in full, and always remember Rule No. 1: be on time.

Apply smartly

Each time you apply for a new credit line, the lender initiates a check on your credit history. Each such check—which we call a ‘hard’ check—pulls your score down marginally. If you apply for too much credit or even credit cards, lenders will see a credit-hungry streak in your profile, which is a red flag. Therefore, when you’re in the market for a loan or card, shortlist your options thoughtfully as per your eligibility. Then apply for one. If you get rejected, understand the reasons for it before you apply again.

Don’t settle

If you have a problem paying your monthly credit card bills, your bank might offer you a one-time settlement. The question is: should you take it?

Here’s how a typical settlement works. Let’s say your dues are Rs 1 lakh. You’re in no position to pay. The lender says pay Rs 40,000 and consider the loan settled. If you take this option, the lender will get off your back. But it will also wreck your credit score.

Therefore, avoid settlements and always repay in full. Even if you’ve opted to settle, approach your lender to repay the dues in full and collect a no-dues certificate. It would also help turn your loan status from ‘settled’ to ‘closed’, which is what you want on your credit report.

Don’t cancel your card

If you’re able to hold on to a credit card or a loan for many years, it reflects your creditworthiness. The age of your credit lines has a minor impact on your score. The older the credit line, the better for your score. Therefore, cancelling an old card may remove the positive effect it has on your score. In fact, it may lower your score slightly. The impact varies from one person to another, and it’s also possible there may be no impact. The reasons for cancelling a card are many. But often it has to do with annual fees or not finding its features useful. In such cases, you could ask your bank to move you to a card that fits your current needs better.

Keep an eye on your score

Your score could move up and down for a variety of reasons. But you have to know about the movement. This would only happen if you were tracking your score regularly. Once a month is enough. These self-checks—also called ‘soft’ checks—do not harm your score.

Movements in your score during credit inquiries, account openings or closures, and high credit card use are quite instructive. It helps you see how your credit behaviour impacts your score. If your score is falling, you could take immediate corrective steps. Sometimes your score could fall through no fault of your own. Recently, while checking their credit reports, some people got the rude shock of seeing unauthorised loan accounts in their names. Some of those loans had been defaulted on. The victims’ credit scores were ruined through no fault of their own. They escalated the matter via the lender and got the fraudulent loans off their records.

Lastly, remember Rule No. 1: always pay on time.