If you talk to any bank for a loan or a credit card, the first thing they will ask you for is your CIBIL score. In fact, your CIBIL score is available to banks through your PAN. A CIBIL score of 750 is generally considered to be a good score for an individual. If your score is below this level, then your credit rating is considered to be low. As it moves closer to 900, your credit rating moves towards excellent.The credit score is a function of a lot of factors. Firstly, it reflects how promptly you repay your EMIs and loans. Secondly, it also measures if you pay your loans on time. Any delay in payment or skipping of EMIs is a negative mark. Thirdly, be careful when you issue cheques. Any cheque bounce or EMI bounce is a negative marking for your credit rating. Lastly, your total debt as a percentage of your income is also a major factor. Remember an important point here. Zero debt is not an indication of high creditworthiness. On the contrary, if you have zero credit history, then you are unlikely to have too many lenders willing to lend to you. Sounds ironic, but that is the way it is!
What is the importance of a good credit rating in financial markets?
There are 10 important reasons for you to maintain a good credit rating (credit score) in the financial markets. Here they go:
1. Ticket to get a loan: Credit score is your ticket to be eligible to get loans. This is truer in case of unsecured loans like personal loans, credit cards etc. You can actually check your latest CIBIL score online by logging into your internet banking account. You can also ask your bank to give you a print for a small fee.
2. Easier to get credit cards: It is much easier to get credit cards if you have a credit score above 750. Credit card issuers check for your credit score. The banks require the individual to have a credit score of a minimum of 750 or more in order to be eligible for a credit card. In fact, the bank will reject the application right away if the credit score is below par. Nowadays, online loan approvals are based entirely on your credit score that is mapped to your PAN card.
3. Concessional rate of interest: You can actually bargain for a concessional rate of interest if you have a good score. Most banks and financiers are really hungry to have customers with a good track record. That is indicated by your credit score. Since your default risk is low, banks will go out of their way to retain you as their customer.
4. Higher credit limit: Normally, your credit limit is a function of your known sources of income. But, if your credit score is well above the 750 mark, then banks will be willing to extend higher credit limits to you. This is useful when you are targeting additional home loan limits. Even in car loans, a good credit rating will ensure that you are required to put in a lower margin for the loan.
5. Premium credit cards: Did you know that banks will be more willing to give you premium cards if you have a high credit score? You must have seen your friends have platinum cards, coral cards, signature cards etc. If you have a credit score that is well above 750 and you have been prompt in paying your credit card dues, then you can always ask for your card to be upgraded and the bank will be more than happy to do so.
6. Express loan approval: Have you heard of express loan approvals by banks; the ads are all over the place. If you have a good credit score, your bank will be keen to give you a quick loan approval. Your loan application will not have that waiting period. On the contrary, you can ask for a pre-approved loan from you bank, purely based on your credit score standing.
7. Special structure: Credit score is useful when you want special structures that are flexible. Say that you are paying an EMI of Rs 15,000 and you want to reduce it by increasing the tenure of the loans. Normally, banks do not entertain such requests. But if you have a high credit score, banks will go that extra mile to structure deals precisely suited to you.
8. Interest moratorium: Most banks have the leeway to give you interest moratorium. For example, if you have a home loan, then you can also take a loan from the same bank for home renovation or expansion. To reduce your immediate burden, you can actually ask your bank for a 3-month moratorium and your actual EMI will only start after that. A good credit score will be useful in such cases.
9. Longer loan tenure: Yes, you can also ask for a longer tenure. Normally car loans are given for 5 years, but if you have a good credit score, you can actually bargain for a 7-year car loan or a 25-year home loan. These are small add-ons that you can only get if you have a good score.
10. Adding value to visa applications: Finally, good credit history can also add value to your visa applications. Most visa applications to countries like the United States, the UK and EU call for detailed income and tax records. A good credit score will also enable you to get a favourable letter from the bank, which can add heft to your visa application.
(By Ketan Shah, Chief Revenue Officer, Angel Broking)