On this 75th Independence Day, resolve to improve your credit score in 75 days

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On this 75th Independence Day, resolve to improve your credit score in 75 days

On the 15th of August 2022, India will celebrate a major milestone in its history: the day will mark 75 years of Indian independence from British rule. In the wake of our independence in 1947 came a multitude of developments that would imbue Indians with greater dignity and freedom, such as the drafting of our constitution and the nationalization of several institutions, including the Reserve Bank of India.

However, a complete actualization of shiny ideals such as freedom and dignity depends heavily on the prevailing situation and the facilities available in the messy real world. For instance, an important precondition for true freedom is financial freedom, that is, having enough money to do what you need to do and want to do in your life. And one of the many facilities that can bring people closer to financial freedom is credit.

Just a few decades ago, many middle-class people were extremely wary of taking on any debt beyond what was deemed to be strictly necessary: a home loan and perhaps a vehicle loan. But the situation has changed quite dramatically now: with modern technologies, automatic risk assessments, peer-to-peer lending, the convenience of taking out loans with minimal paperwork, and other developments, more and more Indians are beginning to see the credit in a positive light, as an enabler of their dreams and a helping hand in times of difficulty.

In addition, lenders today have more data points than ever before to assess the creditworthiness of individuals. Such data points are typically aggregated to derive credit scores for individuals; such a score tells lenders at a glance whether a person is likely to default on their payments or not.

This means that it’s in your best interest to maintain a good credit score and improve it if you can. This is because you never know when you might need to borrow money in the future: if your credit score isn’t good enough, banks and other lenders might reject your loan application, and you might be left with no option but to turn to unsavory lenders with overly onerous repayment terms.

So let’s understand the process of improving credit score. However, we’ll first explore how we got here by looking at the history of credit in India, both prior to and after independence. Along the way, we’ll also take a quick peek at credit scores in other countries.

Credit in India: a quick history

It’s likely that all over the world, people have been lending to each other ever since various means of exchange have been around. The same must’ve been true in India, and we can find mentions of loans in the Vedas and the Jataka Tales. There are also several old texts that condemn usury (moneylending at exploitatively high-interest rates) as being immoral.

In the first millennium of the Common Era, Indian traders would use bills of exchange (i.e. notes that could be exchanged for payment, similar in many respects to modern banknotes) to carry out trade with foreign countries.

During the Mughal era, there existed several different kinds of loans and lending instruments, often referred to as ‘dastawez’. Then, when the East India Company first started to trade in India, families, and communities with disposable income would provide small business loans to traders so that they could conduct their commercial activities.

Starting from 1770, various banks sprung into existence in India. Many of them failed, but some of them are still around today (such as Allahabad Bank, which was founded in 1865 and merged with Indian Bank in 2020). The Reserve Bank of India (RBI) was created in 1935 in response to the economic difficulties resulting from World War I.

Two years after India attained independence, the Indian government nationalized the RBI and gave it various regulatory mandates. Twenty years after that, in 1969, the government nationalized 14 banks so as to make their services more accessible to the general public.

Banking and lending underwent a sea change in the wake of the economic liberalization of the early 1990s. With banks having gained more control over the interest rates they could charge, and with more foreign investment coming in, lending became a more competitive domain, which ultimately benefited the growing middle class.

Then, with the advent of the Internet and the World Wide Web in the 1990s, global banking and payment settlement systems started to take on their current forms. India introduced systems such as the NEFT to facilitate the electronic transfer of funds, making loans even more easily accessible.

FinTech: an explosion in financial inclusion

Improvements in digital technologies over the last decade have resulted in the exponential growth of ‘financial technology companies, or FinTech companies, which aim to leverage modern digital innovations to provide a slew of financial services, such as providing savings accounts, facilitating investments, and extending lines of credit.

Successive Indian governments laid the foundations that would enable such companies, including the creation of the Unified Payment Interface (UPI) and the provision of various open application program interfaces (APIs).

FinTech has a lot of potentials as far as better financial inclusion is concerned. There are several reasons for this. For one thing, a large proportion of the Indian population is either unbanked or underbanked. By providing such people with various banking-like services at their fingertips, FinTech companies can enable them to enjoy financial benefits that they’d previously been missing out on. Moreover, people in remote parts of the country, where setting up physical bank branches is not feasible, can also be easily served in this way.

In addition, FinTech companies typically provide loans with much less paperwork than traditional banks, making the whole borrowing process simpler and faster. One reason for this is that FinTech companies can draw on tools based on artificial intelligence (AI) to assess the creditworthiness of customers who have minimal or non-existent credit histories. This allows individuals and small businesses, even in remote and poor areas, to access credit for important purchases or business development.

Credit scores abroad and CIBIL

However, banks and traditional lenders in many countries typically assess the creditworthiness of potential borrowers using credit scores, which provide an aggregate image of your past borrowing behavior.

The first step in calculating such a score typically involves data collection agencies, called ‘credit bureaus’, gathering data from creditors and creating credit reports for individuals and businesses. These reports are then turned into a numerical score by applying certain mathematical formulas to them, which may be proprietary.

The credit score is a 3-digit score ranging from 300 to 850. The higher this score, the more creditworthy a borrower is.

There are three main credit bureaus that provide credit reports, namely Experian, Equifax, and TransUnion. These bureaus have an international presence as well. While some countries have their own credit bureaus, several other countries rely on the bureaus mentioned above. India falls in the latter camp: India’s leading credit bureau, called CIBIL (Credit Information Bureau India Limited) is majority-owned by TransUnion.

The CIBIL provides borrowers with a credit score known as the CIBIL score, which is a three-digit number between 300 and 900. Whenever you apply for a loan with banks or traditional lenders (or even with some FinTech companies), the lenders get access to your CIBIL score. If they deem your CIBIL score to be too low, they might reject your application right away.

Conversely, if your CIBIL score appears satisfactory to them, then they’ll look at additional criteria to determine your creditworthiness. Note that ultimately, whether to accept or reject a loan application is up to the lender: the CIBIL score is merely a tool that the lender may choose to use as it sees fit. You can check your CIBIL score here.

What does this mean for you, concretely? It means that if your CIBIL score is high, and you can keep it high, then you don’t have to worry about being unable to access credit in the future, whether you need it for an emergency, for healthcare, to buy a house, to buy a vehicle, to study abroad or for any other purpose.

However, if your CIBIL score looks like it’s on the lower side (say, lower than 750), then you might find your loan applications summarily rejected. In such a situation, it is highly advisable that you work on improving your credit score right away. Let’s look at the various ways you can do so.

Improving your CIBIL score

Here are some CIBIL score improvement tips that come straight from the horse’s mouth! Implementing these ideas overtime over the next 75 days can aid in improving credit scores. Moreover, keeping them in mind right from the outset can prevent your CIBIL score from ever going too low, to begin with.

1. Make timely repayments: If you default on a payment or make a payment after its due date, your CIBIL score will drop, as it indicates unreliability on your part. Always stay on top of your due dates, and plan your finances in such a way that you always have enough money available when your loan repayments are due. Several credit and bank apps will also provide you with reminders regarding due dates: make sure you heed them!

2. Don’t max out your lines of credit: It’s important to not fully use the credit offered to you and to leave a healthy margin. For example, if your credit card is good for up to Rs 50,000, try not to rack up a debt of more than, say, Rs 25,000 on it; the lower, the better. This gives a positive impression to lenders, as it means that you’re relatively frugal and can control your debts.

3. Make sure you have a healthy mix of credit types: Certain loans (such as home loans and vehicle loans) are secured by collateral, while others (such as personal loans and credit card debt) aren’t. Too many unsecured loans can cause your CIBIL score to drop, so try to take out some secured loans from time to time, to the extent possible.

4. Be cautious when opening up new lines of credit: If you apply for credit too frequently, it will be seen as a sign that you’re not very prudent with your finances, and your CIBIL score will take a hit as well. Thus, you should apply for credit only if you really need it.

5. Keep tabs on any accounts you might be a part of If you’re one of the holders of a co-signed, guaranteed, or jointly-held account, then you will be held liable for missed payments. Thus, even if you haven’t taken out a loan personally, you could suffer the consequences of your co-holders negligence. Thus, it would be prudent to keep a close eye on any such accounts.

6. Stay abreast of your credit history: In order to avoid any nasty surprises when you can least afford them, you should monitor your CIBIL score and the associated report on a regular basis. Remember: they’re free to look up!

This Independence Day, resolve to become more financially independent!

Having access to credit is an important part of being financially prepared for anything life might throw at you, and it can be mentally taxing to know that you’re in the bad books of banks and lenders. Destroy both these birds with one stone by improving the CIBIL score and keeping it high. This Independence Day, make a resolution to safeguard your financial independence with IndiaLends!