Indians today are far more aware about the credit score and its importance. And as the awareness levels grow, so does the inquisitiveness on how does one manage and maintain the credit score. At Credit Sudhaar, we have experienced people having lots of views on this which can be passed on as nothing but misconceptions. Our customers have talked about the research that they had undertaken and various measures that they had taken to improve their credit profile. One of the measures that has been highlighted by a notable population of our customer base is that they have tried to borrow more from various fintechs and off beat lenders. This has been on account of the understanding the more borrowing is going to help them improve CIBIL score.

Let us find out the facts on this perception.

We all know that the mix of credit types impacts the credit score, and to certain extent this fact substantiates the conception about borrowing more for improvement. So, it means that if a person only owns credit cards and he goes in for other form of loans viz. Auto Loan, Home Loan, Personal Loan etc, it is going to positively impact his credit score. But that may not be true in all cases.

While the variety of loans reflecting on one’s credit report may be of benefit to the individual, the positive impact on the score is quite subjective. Various factors kick in to actually traverse the credit score towards healthier standards. On a scale of 300 – 900 followed in India, closer the score towards 900, the better it is.

Factors that one essentially needs to consider before going in for more credit are listed below.

Credit Utilization

The individual might just be having credit cards, but his spend on the cards will also get subjected while calculating the debt to burden ratio. Credit utilization to over all income and available credit is one of the important factors getting considered in calculation of the scores. Let us take an example – if Mr. A only holds three credit cards with an combined limit of Rs. 3,50,000 and has been consistently utilizing cards for up to Rs. 3,00,000; adding a new auto loan of another 500,000 will not have a positive impact since his utilization of available credit and percentage utilization will increase.

On the other hand Mr. B, also has three credit cards with similar combined limits and the usage has been only for about 15 – 20% of the credit limit; his diversity into the other types of loans will positively impact the scores.

The Fintech Mirage

A lot fintechs have cropped up that are lending small amounts for shorter terms. And we have experienced people taking these short term loans to improve CIBIL score. What these borrowers do not know is that these loans most of the times do not get reported to the bureaus. Even if these trade lines do reflect on the credit report, they may not positively impact the score since these get closed within months (average here stands at 3 months).

Is Credit Actually Required

This is another critically important factor that one needs to rationalize before going in for more loans. In the quest of improving the credit profile, one does not need to put burden on the finances and pay interest for money that actually is not needed by him. The credit should only be accessed if needed. Availing loan without actual requirement can be termed as a financial tragedy.

Last Words

Please remember that improvement of credit score is based on various factors and overall credit profile does impact it. Do not over indulge into credit, keep the credit card utilization below 30% and pay all your dues in time. These simple steps will help you improve your credit score over a period of time.

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November 2020