Will you need a loan to buy a car or a house? Do you know why some people get their loans sanctioned quickly without any hassle, whereas others find that their approval is delayed or their application is rejected? If you want a loan, you will need to work to build a solid credit history because this can have a bearing on the ease with which you get loans. Read on to learn more about what is a credit history and how to build a good credit score.
What is a credit history?
Your credit history is a way of tracking your credit behaviour and habits — basically it shows how disciplined and regular you are when it comes to repaying your dues on loans that you have taken. It will show a complete record of your past borrowing and repayment record including details about any late payments or if you have defaulted on a loan. This track record is readily accessible to lenders and is used by them to when reviewing your loan application. Borrowers who have historically had a bad record of managing their loans and repayments will find that this is captured in their credit history, and their past behaviour can adversely affect their ability to get loans in the future.
Let us understand this better with an example. There are two credit card customers — Shubham and Diven who are colleagues at a software company and have an identical salary package. Shubham has been very cautious of making timely payments on his card and has regularly paid all the bills. After a year, Shubham applied for a Rs. 3 lakh personal loan and the loan got approved quickly since Shubham had a good repayment track record. Diven, on the other hand, used his credit card carelessly and was always late in paying his dues, and even defaulted on his outstanding balance, after which he moved residences as he thought it would be difficult for the credit card company to track him After a few months when Diven applied for a personal loan, his application was rejected. The lender reviewed Diven's credit history and observed that his past repayment behaviour was poor, and so the lender did not want to risk giving him a fresh loan.
Why have a clean credit history?
Good borrowers who repay their debt on time and in full over time develop the reputation of being lower risk. Lenders will be willing to offer such borrowers such concessions that they will not give to riskier borrowers who have a bad credit history.
- Better bargain with the lender: If you have a clean credit record, then you can bargain with the lender for slightly cheaper rates for home, car, personal or any other loan. You might also find that the lender is willing to get give you better terms such as a slightly higher loan amount, or better repayment tenure.
- Loans will be processed faster: If the credit bureau's databases show that you have a good credit history, the lender will have no reason to delay processing and thereafter sanctioning your loan. This can give you a lot of peace of mind and save you a lot of time and running around, especially when your need to get a loan is time sensitive (for instance, where you need a home loan approved to apply for a property transaction before a certain deadline).
Where can you find your credit history?
You can find your credit information report from credit reporting agencies like Credit Information Bureau India Ltd (CIBIL), Equifax India and other such credit bureaus. Each of these credit agencies captures your credit history by means of a score. If you wish you see your score, you can apply to one of these agencies and get your credit history by paying a fee that could be as low as Rs 150. They usually take up to 2-3 weeks to despatch it to you.
What are the good habits for a clean credit history?
Every one can work towards building a clean credit record with a little bit of effort. So whether you have a lot of debt outstanding or have never had debt before, building and maintaining a credit history is totally within your control. Some good habits that you should follow are:
- Pay your bills on time: Maintain a good repayment record on all your payments due as that is the first step to a clean credit history. These payments can be monthly instalment towards your house or car, a personal loan or a credit card. Sometimes, credit bureaus might even track how timely you are in paying your utility bills like for water and electricity, as these can serve as a proxy for how you behave when you owe money to someone.
- Check your credit score: If you are going to be in the market to apply for a loan, it might be worth your effort to get your credit score from one of the bureaus. If you see that something has been captured in error or is wrong, you can ask for it to be corrected or at least you can ask for a clarification before you make your loan application
- Keep the number of loans to a minimum: Credit is easily accessible in India now, but just because its available does not mean that you should take multiple loans. Credit bureaus also track the number of loans you have outstanding and if its seen that you take a loan for everything then it will suggest that you are living beyond your means. Clear off existing debts before you take on fresh loans. If you take too many loans you might enter a vicious cycle of having to take fresh loans just to pay off old debts.
- Maintaining account balance to avoid cheque bounces: If certain EMI payments or bills are due, make sure you have enough in your savings account to meet these payments. The last thing you want is to suffer from late payment just because of a cheque bounce.
What are the bad habits that you should avoid that could impact your credit history?
Some common habits to should avoid are:
- Using credit card to withdraw cash: Don't use your credit card to withdraw cash, use only your debit card. This way you know you are accessing only that cash that is within your means by virtue of being in your account.
- Avoid too many loan applications: Lenders track the loan applications that you make. If one lender has rejected you, doesn't mean you apply to a dozen other lenders so that you can improve your chances of getting a loan. Credit agencies also capture the number of times you make loan applications. The more applications you make, the more is suggests that you are desperate for a loan and this can be interpreted that you might be high risk
