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Money Aug 7, 2012

Your credit report sucks! Time to give it a makeover

By Bindisha Sarang

There could be number of reasons a.k.a. excuses for why your credit report looks terrible: salaries aren't increasing at the rate at which inflation has, so it has been difficult for you to service your debt. Or, you've simply been a credit junkie, flashing the latest iPad and smart phone and blaming maddening consumerism for your poor credit score. May be, you've simply taken some unwise decisions- inadvertently of course- which have hurt your credit report. Whatever the reason, you better take steps to give your poor credit report a makeover.

Why the makeover: Reason being, going forward it's going to be extremely difficult for you to get any more credit. VN Kulkarni, Chief Counselor, Abhay Credit Counseling Center, a Bank of India initiative, says, "If you have a poor credit report, which results in a poor credit score, it's going to be very difficult for you to get future credit. Banks don't want to give loans and credit to people who don't pay back on time." Also, with the number of banks' Non Performing Assets increasing, banks are extra cautious to give credit. And, checking consumers' credit score before deciding on a loan is now the norm. So, here a quick guide to give your credit report that much needed makeover.

Read on, take the necessary steps, and you might just get a better deal on your next loan. Says, Harshala Chandorkar, Senior Vice President- Consumer Relations and CIC compliance, "We have heard of cases, where those with a good credit

Why it's time for you take your credit history seriously. Reuters

report or a higher score have managed to get a better deal. Some have got their processing fees waived off. Others have seen their loan being processed faster. In fact in developed countries, customers with a higher score also get better deals, as far as interest rates goes. Even in India a few banks offer a lower rate to those consumers who have a higher credit report."

Get multiple credit reports: First step is to ensure that you just don't go by one credit report. You could get your credit reports from CIBIL, Experian or Equifax. Mohan Jayaraman, Managing Director, Experian Credit Information Company of India Private Limited, says, "Repairing the credit report does not happen overnight. Get your credit reports from multiple bureaus and check for any wrong entries or where clean up in the report is needed. Once you are aware of where your credit reports stand, you will be able to look into the right steps to repair it."

Always pay on time: Everyone knows that when you are late on your payments or when you default on paying the Equated Monthly Installment (EMI), it affects your credit report negatively, thus decreasing your score. If you are really struggling to pay the EMI's, you could approach the bank and tell them about it. Jayaraman says, "Approaching the lender and asking for a re-scheduling or some sort of moratorium, may work in your favour." This would help your cash flow situation.
If money is not an issue, but you default or are late, because you forget to pay on time, use technology to help you deal with this issue.You could arrange for an auto-pay facility on your credit cards. But do look into your monthly statements for any discrepancy in billing. And use your bank's Electronic Clearing Service (ECS) to your EMIs and like.

Have a healthy credit mix: Ensure that you have a mix of different types of loans. Kulkarni says, "If you only take on unsecured debt like credit card and personal loans, it might work against your report." It's best to have a mix of debt, like a secured home, auto loan and like. If you have a huge credit card debt, and have some gold sitting idle in your bank locker, it makes no sense to pay 45% p. a. on the credit card. Instead, you could take a secured loan like a loan against gold (at much lower interest rate) and pay of the credit card.

This way you replace a high interest unsecured debt with a low interest secured debt. That way, you not only save on the interest expense but also able to have a mix of credit on your report.

Stop shopping for credit: Avoid making too many credit cards and loans inquiries. The more you shop around for loans or credit cards, the worse your credit report gets. Says, Chandorkar, "Don't be hungry for credit. Every time you make a loan inquiry, the banks check your credit report and that would decrease your credit score slightly"
As far as possible apply for new credit in moderation. Also, if possible use the online loan portals to compare and zero down on a lender or two. So that way, you won't approach a large number of loan providers for a single loan requirement.

Don't go for settlements: Taking a settlement on your existing credit card or loan is possibly the worst thing you can do. "Settlement of an account" means when the lender is willing to take a lower amount than the total amount you actually owe. Kulkarni says, "Settlements sounds good, it seems like you are saving money. But settlements have a negative impact on the report." Instances have been heard, where the total debt owed was Rs 1 lakh but the borrower and bank settled for Rs 50,000. This might seem like a saving, but it's not. Kulkarni says, "Not only does it give a poor score. Banks don't want to give credit to those who take settlements. You don't want to get into the habit of settling accounts if you are 35 years or less." After all you have a large number of years ahead, and you never know when you might need credit in the future.

Quantum of loan: The ratio of the amount of credit you use as compared to the total credit available is an important parameter. So, if you have a credit card with a credit limit of Rs 1 lakh, and you've used more than 90%, it works against you. Also, never go over the credit limit on your card. If you do, you not only pay an over limit fee, you even compromise on your credit score. It's a good financial practice to have not more than 40% of your gross salary going to service your loan EMI's and credit card dues.

Close inactive cards:
While closing or cancelling cards could cost you a few points on your credit report, it's still a good practice to close all cards which you don't use. Jayaraman, says, "First, you won't be tempted to take more credit. Secondly, from frauds point of view, it's best to close and cancel card which you no longer use or don't plan to use in the future." Of course, older cards help you built a credit history, but we suggest, not to be worried about the age of the credit history and simply close the inactive cards.

Other options: If you need to re-build your credit history (after defaults), you could go for a credit-builder credit card to improve your score. Many banks like ICICI Bank Ltd and Axis Bank Ltd offer such cards. These credit cards are given against a fixed deposits and charge a lower rate of interest. So, if you pay your dues regularly on these cards, you could be able to build a better credit history within a few months. And your report would automatically improve. These are just a few steps you could take to give your credit report a makeover. But the best thing to do is to be financial disciplined. If you cannot do it on your own, we suggest you visit a credit counseling agency like Abhay. Their services are free.

by Bindisha Sarang

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