Credit history guides your future borrowing

Timely payment of your dues will not only result in good credit score but also help you get faster credit in future

Credit history guides your future borrowing
Prominent among the prudent financial habits is your responsibility to honour credit commitments; beginning with your utility bills and ending in larger monthly instalments of mortgage, car or personal loans — everything that goes on to define your credit report and eventually the credit score, upon which your future credit approval depends heavily.

A credit report is the sum of your financial history that points out your commitment, intention and ability to repay debt that is further used by banks and NBFCs (non-banking financial company) to help them decide whether you are eligible for a loan or not. The lower your credit score the lower your chances of obtaining credit.

There are many ways to repair your credit score as lenders also welcome a positive and corrective attitude among borrowers. Listed below are a few imperatives that an individual must bear in mind to ensure a credit track record.

Get a credit report, assist bureaus to keep it updated

At the outset, one needs to approach a credit bureau to get the latest credit report which must be validated for errors and old information.

Ensure that there are no late payments against your accounts and that numbers against every account are true and factually up-to-date. If you have lent your name as a joint borrower or a guarantor to someone else, it would show up on your credit report. Any default here would also dent your credit record hence it is important to routinely examine your credit report.

Pay on time to get credit on time

Just like building your house, your credit summary too is built, brick by brick. Every month when you pay up dues either on your mortgage loan, credit card, personal loan and even your mobile bills, you are creating a positive image about yourself in the minds of potential lenders.

A timely payment of your dues will not only result in a good credit score but will also help you get faster credit in the future. This is the best and only solution to be considered ‘worthy’ by banks and NBFCs.

As such, there is a three-day grace period allowed by the regulator for paying up installments but once you cross that, the information gets updated by credit bureaus against your credit record. In the case of credit cards, banks do allow a minimum due payment as against a full payment, in order to not be considered as a defaulter.

Always maintain a mix of credit

A positive credit mix will get higher weightage among potential lenders for a responsible and balanced credit handling. A credit mix gets created when you successfully manage different types of credit (from credit cards to EMIs on various loans), displaying a healthy approach in using all sorts of debt, thus emerging as a financially smart and reliable individual.

Space out credit applications

Applying for multiple lines of credit within a short period is seen cautiously by lenders since the applicant may be desperate for funds — albeit from any source of credit.

Even though you may hedge with one application against another with a different lender, it would create skepticism over your ability to repay hence it is wise not to make too many credit applications simultaneously. If one lender rejects the application, it would put more negativity over your application with the next lender.

Have a reliable residential address

A stable job, a steady income and a reliable address (where you have stayed long, and also included in electrical rolls and other mandatory IDs) can be viewed positively by lenders. You must remember to use the address on all important documents to be seen as a dependable.

Budget analysis of cash flow

It is important for one to set financial goals, to plan ahead. Planning investments as per the income flow and expenditure and making necessary credit provisions help in repaying one’s EMIs or saving funds in the case of an emergency.

Combining these goals with a good credit control process ensures a healthy cash flow.

Borrow within reasonable limits

Prior to taking a loan, it is essential to know how much you actually want to borrow. Sometimes, individuals avail loans far too early into their careers without understanding the consequences and the potential impact of what a default could do to their credit score.

Such behaviours could result in lower credit scores, thus making it difficult for an individual to borrow in the future. It is always advisable to avail around 70% of your ‘available or allotted’ credit. In short, one should not be over-burdened and should avail credit only if it is required.

Reach out to lenders in times of hardship

Most of the lenders would appreciate a forthright approach — regarding your ability to pay dues — if you have fallen on hard times as they would like to be aware of your situation.

This will be seen as a responsible behaviour though nothing would be taken off your liabilities. Remember, your credit history is akin to the story of your health — you have to maintain some good habits to be fit for life.

(The writer is Executive Vice President and Head – Business, Marketing and CSR, Fullerton India Credit Company)

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