If you are planning to take a loan to purchase a house, a car or a high-priced consumer good one of the first things you should do is to check your credit score to know the chances of a loan being sanctioned or rejected by the lender.
Credit score reflects one’s creditworthiness which depends on various factors including your past history of loan default. The score is arrived at by credit bureaus on the basis of data made available by lending institutions every month. On an average, credit scores range from 300 to 900 though a majority of the loans are offered to people whose credit score is higher than 750.
The gradation is as follows:
Above 800 – Excellent
Between 750 and 800 – Good
Between 700 and 750- Fair
Between 650 and 700- Poor
But, what if your credit score is low leading to loan rejection? You need to take immediate steps to improve your score so that loan applications in future sail through. Some of them are:
1. Do not repeat past mistakes to ensure that you do not default again.
2. Make use of credit prudently: As long as the sum of your EMIs does not exceed 50% of your take home salary, most banks are open to giving you a loan though you must stick to a prudent limit of restricting all EMI and credit card payments to 30% of your take home salary.
3. Don’t display credit hunger: If you make use of credit cards, it’s best to curtail its usage up to 40% of the credit limit allowed on the card.
4. Get errors rectified: Low credit scores can, at times, be a result of errors in the records of lending institutions. A loan might have been paid off but its records might not have been updated in the lender’s books or you might have become a victim of identity fraud.
5. Pay your bills in full: It is best to pay your entire credit card, electricity & phone bill every time before the due date. If you cannot pay the entire amount for whatever reasons, try to pay as much as possible and not just the minimum amount.
6. Don’t close old accounts: Old loans and credit cards with good repayment history prove that you have been using a loan or credit card for a long time and are good at paying your EMIs on time.
7. Don’t randomly apply for fresh credit: Each time you apply for a loan or credit card, the bank raises a query for your credit history. Such frequent requests give the impression of being credit-hungry and can bring down your score.
8. Boost your card limit: A low credit limit on your card with high utilization does not present a very impressive picture. On the contrary, if you increase your credit limit and use a lower amount it would bolster your credit score.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’