Sheetal is a 38-year-old lawyer who is employed in the corporate sector. She is doing well at her job and wants to move into a bigger apartment. Recently, she applied for a home loan but found that her loan eligibility was lower than what she had anticipated and the interest rate was higher than the prevailing rates. When she enquired about this, she was told that it was because of her low credit score. Sheetal accessed her credit score from CIBIL and found that it was only 600. She knows that the score ranges between 300 and 900, and higher the score, better the credit worthiness. Her banker told her to improve her credit score so that her ability to borrow at lower costs is not affected. Sheetal wants to know how she can do so without surrendering her credit cards. She has no other loans.

Sheetal’s credit score is drawn from her past behaviour of credit usage and repayment. She must look into her credit history and see if there are any credit card balances that remain unpaid or disputed. If so, this would be the reason why her score was impacted and she must settle it as fast as possible. Opting for automatic debit facility with her bank for bill payments and loan repayment will ensure that obligations on any loan or credit facility are met on time. However, Sheetal has to make sure that her bank account has sufficient funds so that there are no instances of default on account of insufficient funds. If she has any savings, she can use it to pay off high-cost debt as outstanding debt has a large impact on the credit score. She must particularly do this if she has a high concentration of unsecured debt, such as credit card outstanding, which is seen as less desirable than secured debt from a credit rating point of view.

Sheetal must also work towards improving her attitude towards credit. This includes cutting down on her credit card usage so that her credit utilisation ratio, which is the amount of usage relative to credit limits, improves over time. She should avoid seeking too many credit facilities too. Staying away from credit completely may not be the right way to improve her score as she needs to exhibit her ability to be disciplined in using credit and meeting obligations. All these moves will improve her credit score over time. This will not happen immediately and she will have to keep working on managing her credit behaviour.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.