How to manage good credit scores is a question often found on Quora and sometimes on Google Trends.

The beautician in the salon offers me sweets. I ask why before saying Congratulations.

“My husband’s CIBIL has been corrected. We can now apply for a home loan.”

…..there follows a long story about credit card debt, but she does not know the full form of CIBIL.

Well, all of you know that it is a credit information company (CIC) or credit bureau, but it is not the only one.

CREDIT INFORMATION COMPANIES

There are four CICs which give you a credit score

1. TransUnion CIBIL
2. CRIF HighMark
3. Equifax
4. Experian

All of them offer one free credit report in a year.

Woe begone, if your credit scores from different bureaus do not match….

Yes. The scores given by different credit bureaus need not be identical, as they follow different systems and algorithms. The list of lenders which send them data need not be identical.

Updation of credit scores takes some time, maybe a few weeks, and the calendars they follow could be different.

They do check and verify on payment of a fee.

In case of controversies, some lending institutions may take an average of all four scores.

PUBLIC CREDIT REGISTRY (Proposed)

The PCR will be an information repository where all information about existing and new borrowers will be collated. It will include data from entities like Securities & Exchange Board of India (SEBI),  Corporate Affairs Ministry, Goods and Services Tax Network (GSTN) and Insolvency and Bankruptcy Board of India (IBBI).

The plans have not taken a final shape, but needless to say that data is the new oil to run the economy.

WHAT IS MY CREDIT SCORE, IF I HAVE NEVER TAKEN A LOAN?

It will show a score of -1 by convention. There is nothing to worry about.

If you apply for a personal, vehicle or home loan, with no credit history, the lenders will ask you to get a credit card, and pay bills on the due date for 6 months.

Lenders need to see your financial behaviour for at least 6 months.

Some people who are debt-free today get a score of 800+.

• It comes from past history.

• Zero outstanding balances contribute to the score.

• You may have been issued a credit card, which is not in use, but it counts.

WHAT IS THE IDEAL CREDIT SCORE, AND HOW DOES IT MATTER?

The commonest questions I come across like platforms on Quora are

• What credit score is considered good?
• Can 700 be considered a good credit score?
• Is 600 a good credit score to get me a loan from a bank?
• What is the ideal credit score to buy a car?
• Is my credit score important, if I’m not looking for a loan?

The answers are summed up in a few lines.

Banks look at a credit score of minimum 750 before giving you a loan.

Financial institutions will check the credit score before giving you a job.

Non-banking financial institutions target borrowers with a credit score in the range of 600-750, and lend at higher rates of interest. They accept the risk to earn more. Higher pressure may be used in recovery methods.

WHOSE CREDIT SCORE IS CHECKED IF THERE ARE CO-APPLICANTS IN A LOAN?

The credit score of both applicants, and guarantors are taken into account.

It could be a home loan or an education loan.

DOES AN INDIVIDUAL’S CREDIT SCORE AFFECT THE BUSINESS LOAN SOUGHT BY HIS FIRM?

Yes. It matters in case of proprietorship and partnership firms.

Directors are not liable for a company’s outstanding dues, but the bank can ask for the credit scores of directors. It is about profiling a prospective borrower.

WHEN YOUR CREDIT SCORE IS UNEXPECTEDLY LOW

Think about the following possibilities-

• Are you a guarantor to someone? It affects not only your credit score, but your eligibility to take a loan.

• Is there a savings or current account, where you have not maintained adequate minimum balances? The bank may have debited non-maintenance charges, leading to a debit balance and accumulated interest on the account.

• Was there a forgotten outstanding balance in some account, when you changed your address and contact details? It could be an unpaid instalment of a student loan, or outstanding charges on a credit card you never used.

• Have you signed on the dotted line somewhere without reading all the clauses, to demonstrate full faith in a family member?

• Do you recall a settlement on a loan or credit card, not realising that it will impact the credit score?

• Did you pay the Minimum Amount Due, on the collection agent’s advice, to maintain your credit card account, but did not realise that your credit score will be impacted?

• Is there a default in repayment, before 1st March, 2020 or after 31st August, 2020 and you think that credit scores will not be impacted under the Covid-19 EMI moratorium scheme?

• Have you been trigger-happy in applying for a loan to too many lending institutions? Too many enquiries from lenders reduces the credit scores, as it gives a signal that lenders do not find you suitable as a borrower.
• Is a family member going berserk with an add-on card, and you are unable to pay bills fully on the due date?

ARE YOU IN A FINANCIAL MESS?

Financial mess sounds quite harsh, but it is a state where any of the following sentences are applicable to you

• creditors are chasing you
• there is not enough money to cover your cost of living 
• resources are there, but do not know how to navigate your way through a crisis
• You have pledged/hypothecated/mortgaged all your assets to lenders, and fear repossession
• there is a problem in sorting out priorities in repayment of loans

Check the current value of your assets, and the loans you have raised against those.

Compute the present value of your assets not under lien of any bank.

What can be done to repay the outstanding debt? Can you borrow from another source at a lower rate of interest – like taking a personal loan to pay credit card debt?

Gold loans are tempting with the ease of getting money, but think from where will you raise resources to repay the loan. Is it a better idea to just sell the gold rather than pay interest for an indefinite stretch of time?

If there are no free assets to speak of, do a detailed exercise on your bank statements.

Classify all expenses into

• Essential monthly expenses
• Annual payments on insurance, house maintenance, taxes etc.
• Impulsive spends
• Wasted expenditure

WHAT IS SAVINGS POTENTIAL?

I did an impromptu exercise while moving from one city to another.

We were sorting out stuff which could be given away. All was not old. There were many things which we classify as impulsive spending – 

1. Goods bought from a sale, 
2. items from online purchases which did not fit but I was too lazy to return those 
3. Expensive high heels which were impractical to walk on. A knee problem had ruled out their use forever
4. Decorative pieces bought on festive occasions, or for a holiday, then buried somewhere
5. Garments worn once, before they are declared outdated or I outgrew the size

I put a quick total number on the amount spent on those discards – that was my savings potential for the future. I could have, and can easily manage life without buying those items.

I extended the exercise further.

COST CONTROL ON ONLINE ASSETS

There were online subscriptions and software purchased but not used. 

I visited each site to turn off the auto-renewal option. The companies have a way of charging the amount to your card on anniversary of the purchase. If you call them asking for a reversal, it is reversed. If you are lazy, you carry the burden.

There was a software sold to me at a one-time price, but the same amount was charged again after a year. I chose to let it go.

If you have purchased anything with a free trial period like Powerpoint on Mac, or a LinkedIn Premium membership, but are not happy with it, opt out of it at the right time – before they charge the amount to your card.

Are there any employment benefits you have not claimed, like reimbursement of mobile bills?

Do you have any reward points not utilised? Take care that you do not spend more money, or buy unnecessary things to encash those reward points. The best items to purchase are essentials or something that you were planning to buy – like shoes for a fast-growing kid.

Always carry the cards which can fetch you a discount somewhere. These could be membership or identity cards.

The amount thus saved can be used to repay outstanding debt.

You may contact Reena Saxena for financial coaching to embark on this journey to financial wellness.

WHAT CAN YOU DO TO IMPROVE YOUR CREDIT SCORE?

Take a honest overview and see where you stand.

• Let the bank know that you wish to get out of the guarantee given. In case another guarantor is found as a replacement, the bank may accept your request. 

• Ask for a review in case of a dispute on the credit score. At times there are delays in collation of data leading to an erroneous score.

• Complain to the Banking Ombudsman if the bank and credit bureau fail to resolve the dispute within the prescribed period.

• Settle as many loans as you can, maybe the ones lower in value, or the ones which carry a higher rate of interest, by adopting the cost-cutting methods discussed above.

• Do your budgeting right, and follow it scrupulously. Watch this video for more on budgeting

• Contact a professional for help.

• Read the book “Why is my Credit Score Screwed Up?” By Aparna Ramachandra. She is the founder of rectifycredit.com

The book is available on Amazon.

Related post – How many credit cards should you have?

Wishing you financial wellness, but remember it will take time, and do not live in denial.