August 05 , 2013
With the advent of the credit report era, reckless credit card users and loan borrowers have something new to worry about. Unless you have an impressive credit history you'd find it very difficult, close to impossible, to get new loan or credit card.
Understand how credit report and score are used
Any bank or other lender first scans credit report of a loan applicant to ascertain he'll make a safe customer. A safe customer for a lender is one who has neat credit repayment history in the past, apart from having enough repayment capacity. Credit reports are prepared by Credit Information Companies (CICs). All banks and lenders are required by RBI to register with at least 2 such CICs and supply them with credit information of their loan customers on a monthly basis. Credit Information Companies collate repayment information and prepare reports which can be bought and used by lenders in their loan approval mechanism.
Credit reports carry 'defaulter' status if you missed EMIs in the past. If you have been rejected by a lender for poor credit history you can ask them to share your credit report with you. Alternately you can buy your report from the concerned Credit Information Company yourself, for a small fee. Go through it to understand which aspects of it need to be improved. If in fact you are clear on all dues but the report shows otherwise it could be that your bank has not updated data with CICs. Meet them personally and get the matter sorted out and if there is any outstanding amount settle it amicably.
How to improve credit score
If you had indeed committed past credit sins, there is no shortcut other than improving your credit behaviour. Of course this will not happen overnight. You might have to keep a contingency fund in place so that a temporary job loss or illness does not disable your ability to service your debts.
To cut it short, follow these 2 plain steps diligently:
- Pay off pending EMIs or credit card dues at the earliest.
- Don't miss further EMIs at any cost. In case you are co-borrower for some loan, ensure the other borrowers also pay up on time. Further if you use credit cards don't close them; use very low credit and maintain minimum or nil balance. This builds positive credit.
Credit score not improved after clearing past dues?
After you have paid off your dues do not get desperate if you do not see scores improving immediately. Ideally the bank should report the change to CICs in 30 days but credit score would take longer to improve.Credit reports and scores do not just reflect present status. Remember, clearing what you missed is great, but that is just the start. You need to show that you can now be trusted with credit and will responsibly abide by your terms without default. This requires time to be tested.
Continue paying off debts on time or if you possess credit cards keep low balances. What better way to prove you've changed and are prudent with credit? Unused credit gives off the feel that you are financially secure and know to live within means. So keep the credit cards and give them this chance to record your positive credit behaviour.
If you come across unscrupulous advices like "take a personal loan so that you have a credit history and better chances of loan approval", "buy credit report at least 3-4 times a year" just scrap them. Personal loans and credit cards are the most expensive ways to borrow and should be avoided as much as possible. Unless you have had a messy past repayment track or your loan application has been rejected, there is no reason to be worried about your credit report.