If you’ve ever read personal finance books and other related literature like columns, blogs or even podcasts by Western authors, especially those from the United States and United Kingdom, you’d know that the Credit Score is talked about with a tone of grave importance and constantly emphasized to be crucial if you ever want to have a positive relationship with your banker. Although Indian banks don’t place the same level of emphasis on Credit Scores as the banks in the UK or the US do, there is no doubt that double-checking Credit Scores, especially of individuals, has become more relevant and commonplace in our country.
What are Credit Scores?
A Credit Score, or a Credit Rating, is a three-digit number that is allocated to you based on your borrowing habits. Think of it as marks that you receive from your banks and financial institutions for your performance in the subject of financial discipline. This score is calculated based on a number of factors, including how regular you are with paying your credit card bills on time, your loan repayment history, how long you’ve maintained lines of credit (loans and cards) and whether or not a bank has had to move to court to recover loans from you. The higher your credit score, the more desirable you are to the bank as a potential lender, because your score essentially reflects how good you are with paying back dues.
How does it work?
Your Credit Score is calculated by Credit Information Bureaus. There are currently four such bureaus in India – TransUnion, CIBIL, Equifax, Experian and High Mark. Every time you make a transaction that impacts your credit card (for example, paying your credit card bill), this information is submitted by your bank to these credit information companies. This sending of information is mandated by the RBI. Every time you sign up for a credit card or take on an EMI, you’re agreeing to this in the fine print. It is also relevant to note that as our country charges forward with digitizing financial transactions and linking PAN and AADHAAR cards to phones and bank accounts, collecting information about these transactions have become easier than ever. These credit bureaus then collate the information and arrive at a score based on your transactions. The methodology of arriving at the Credit Score by all four bureaus is extremely similar, so if you have a poor score with one bureau, it’s highly unlikely that it will be better with another.
How do I get a good score?
If you already have a credit card or have taken a loan, making regular payments in full and on time will bump up your score. These days, Credit Scores are taken into consideration by banks for all kinds of loans, so having a good score will play a part in your getting the loan, especially when you don’t have any kind of previous/family relationship with your bank. If you’ve never taken any line of credit before, your score will be neutral (neither good or bad). If you want to improve your Credit Score, you could consider getting a credit card for a few months, making small transactions and paying them back on time – but do this only if a good score is absolutely necessary and if you are sure that you can exercise control because credit cards can be evil.
Why your score matters
Availing a line of credit can be potentially life-saving during emergencies, especially for women, who might not always have solid securities or assets that they can pledge in a moment’s notice. However, the disbursement of these loans has become increasingly dependent on the individual’s Credit Score, which is why it is important for women to not only be aware of their Credit Scores, but also work towards making them a number to be proud of.