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Why it is Important to Effectively Manage Your Credit Score

Why it is Important to Effectively Manage Your Credit Score

10 Mar 2011
The Economic Times

Edition: Mumbai, Kolkata, Bangalore, New Delhi Pg: 11


In the rapidly-evolving credit landscape, it has become almost impossible for defaulters to get a loan from banks who actively use credit bureaus. The increasing significance of credit reports to the loan seeker prompts questions like what a ‘credit report/ score’ is and how it affects them. A credit report is a compilation of information about the individual and his or her credit history that has been reported to the credit bureau by those who granted credit to the individual. This report reflects details of all the individual’s loans, credit cards and other borrowings. It contains information like the date opened, credit limit, outstandings, overdues and written- off amounts among others. An individual’s credit score is generated by information on their credit report, but is not part of the credit report itself. Credit scores can project the amount of risk posed by the individual to a lender. When lenders request an individual’s credit report, they often choose to receive a credit score at the same time, and will select which scoring model they want to use. Large lenders may use a customised scoring model.

For example, for auto loans, a lender may use a scoring model that focuses on car payment history. Lenders will typically evaluate an individual’s credit report and credit score along with other key information, such as income, against their own internal decision criteria to determine the individual’s ability to qualify for a particular loan type. In future, lenders are also likely to use the credit scores to decide on interest rates. The rates will factor in the perceived credit risk depending on one’s score. Credit scores can change gradually over time as one’s overall credit picture gets better. This happens by consistently engaging in credit-worthy behaviour going forward, such as paying one’s bills/EMIs on time and using credit conservatively. There are a few good habits to keep in mind to maintain creditworthy behaviour. The first one is paying bills on time. Delinquent payments can have a significant negative impact on your score. If one has missed payments, they should do their best to get current and stay current. Debt should be paid off rather than shifting it to other accounts.

One should look to re-establish their credit history if they have had problems. Opening new accounts responsibly and paying them off on time may help in the long term. One should also be prudent in applying for and opening new credit accounts. Credit cards can be kept, but they need to be managed responsibly. In general, having credit cards and instalment loans (and paying timely payments) may favourably impact your credit score in the long term. If one is having trouble making ends meet, one should contact his or her creditors. Lastly, one should keep balances as low as possible on credit cards and other revolving credit. There are also some areas one should tread with utmost caution. One should not close unused credit cards as a short-term strategy to try to raise their score. Also, one should avoid opening a number of new credit cards, just to increase the credit available. This approach could actually have a negative impact on one’s score.

If a person has been managing credit for a short time, avoid opening a lot of new accounts too rapidly. Adding new accounts will lower the average account age, which could have a negative impact on the individual’s credit score, particularly if s/he is a new credit user. It takes time and there is no quick fix for eliminating past aspects of one’s credit history that may negatively affect their credit score. Credit scores are based on one’s credit history and can generally only be changed over time. Remember - accurate and timely negative information cannot be removed from your credit file. Your best approach for establishing credit worthiness is to handle your credit responsibly over time.

Samir Bhatia MD & CEO Equifax Credit Information Services