Your credit score reflects your credit habits to your bankers and therefore it is indeed important for you to be concerned about your credit score. As such, people are now getting aware of the importance to review their credit reports regularly. Even the regulator, SEBI, has acknowledged the need to regularly monitor the credit reports and thereby calls for one free report on an annual basis by the credit information bureaus. Reviewing your credit report indeed helps your diagnose your credit health. While your repayment record largely impacts your credit score, there are other matters impacting your credit score too.
Let us suppose that you have an option to take a secured loan for your business. However, at the same time, a new-age bank offers you a personal loan without any security at same terms, on the basis your income. You will indeed be inclined towards opting for an unsecured personal loan, but beware! This may result in adversely affecting your credit score.
A secured loan is a loan against which the bank has sufficient security against the funds lent to the borrower. Mortgage loans, Loan against Property (LAP) etc. are examples of secured loans. Similarly, personal loans and credit cards fall into the category of unsecured loans. An unsecured loan reflects a higher credit risk of lending the amount to you. More so, since the bank does not have any security to fall back upon, in case you default on the contractual repayment terms. This is why the higher ratio of unsecured loans in your credit profile adversely impacts your credit score.
Besides this, in a secured loan, banks only lend a certain amount determined by the market value of the security. Rest of the funds are invested by the borrower himself. Since the borrower’s money is also at stake, this results in higher tendency to pay. As such, better repayment habits translate into a better credit score.
Also, a healthy credit portfolio of secured and unsecured loans helps your credit score as it reflects better credit management at your end. Regular account history with continuing timely repayments improves your credit score since the banks perceive such borrowers as less-risky borrowers in terms of default.
Here’s how You Can Improve Your Credit Score
Your credit score is the first thing your bank will check before judging you on other parameters like your salary, other loan obligations, your repayment capacity etc. So, a higher Credit Score should ideally help you get a loan at more favorable terms.
Recently, one of the leading public sector banks has linked the rate of interest to the credit score. Customers having a credit score higher than 760 will be charged 8.35%, those in the range of 725 to 759 points will be charged 8.85% while those having credit score below 724 points will be charged 9.35% on home loans. This spread of 1.00% indeed asks for a regular monitoring of your credit score and immediate corrective action in case of any misinformation stated therein. Other banks are also likely to follow in taking such a step.
Tips to Improve your Credit Score
Since your credit score impacts your loan taking capacity and also your interest outgo, it becomes imperative for you to have a better score. Here are few measures through which you can improve your credit score:
1. Timely Repayment of your EMIs/ Credit Card Dues – Repayment history is one of the prime factors determining your credit score. As such, one should always aim to pay off the credit card bills and monthly installments of your [highlight color=”yellow”]business loans/ personal loans[/highlight] without any delay. Timely repaying habits translate into a higher credit score for you.
2. The lesser number of Casual Loan/ Credit Card Inquiries – CIBIL records each time your credit report is pulled from their website. There is a dedicated inquiry section in the credit report that lists all the loan inquiries made by you with any lender. This leads to a creation of the poor perception of being credit hungry, even while there may not be serious reasons for loan rejections.
3. Lower Utilisation of the Credit Limits Sanctioned – Credit report not only reflects your repayment tendencies but also your debt management skills. If you are continuously using the full credit limits and more frequently paying just the minimum amount due, the credit score will get lower and is also viewed negatively by banks.
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