How to improve your credit score this Eid

Sacrifice these common misconceptions to improve your credit score this Eid, says Rajiv Raj.

Eid al Adha or Bakri Eid is upon us again which marks the celebration of total unquestioning faith of Prophet Ibrahim who was ready to sacrifice his own son at the altar to prove his love and trust in the Almighty Allah. This Eid therefore as you celebrate the festival with much fervour with your family, how about making a wow to make a ‘Qurbani’ or the sacrifice of ignorance that clouds your knowledge about credit scores.

If you do so, you are well on the path of improving your credit score.

Credit scores are a marketing gimmick and do not really matter

This is potentially the most dangerous misconception that people have about credit scores. Credit bureaus are neither selling a product or service, but are compiled on the basis of your credit history or your record of servicing your credit lines.

Credit scores thus do not need to be ‘sold’. However, they are very important for you as a consumer, because potential lenders must mandatorily refer to credit scores as a part of their credit assessment process.

This therefore means that the higher your credit score the better your chances of getting access to timely credit.

There is only one type of credit score

There is some kind of awareness about CIBIL, India’s premiere credit bureau and undoubtedly the CIBIL score which is a three digit numeric from 300-900 that is most referred to by banks while assessing your CIBIL score.

However, CIBIL is not the only credit bureau in India. Other retail credit bureaus in India are Experian and Equifax while CRIF High Mark records data related to microfinance institutions.

Financial advisors say that it is prudent to check your credit score from all three retail credit bureaus at least once annually.

If I close a credit card account it does not impact my credit score

One of the factors that impact your CIBIL score is the age of the account. Thus the longer the age of your credit the better position you are in. Therefore, it is never advisable to close old credit card accounts, even if you are no longer using them as it adds to the age of your credit.

Freeze it in a cube of ice or keep it stashed away in a locker so that you cannot use it any further, but do not close it.

The higher the debt I carry on my credit card, the better is my CIBIL score

The amount of credit you use as against the total credit that has been sanctioned to you is called credit utilisation. The higher your credit utilisation, the higher is the negative impact on your score.

Credit experts therefore suggest that to keep your credit score prim and proper you should not exceed an utilisation of 30 per cent.

No credit is equal to a good credit history

This is another myth that people have regarding the use of credit. Though the younger generation is warming up to the free use of credit, there are still people who think that not availing of any credit line at all and making all cash transactions is good for one’s credit score.

This is completely untrue as not accessing any credit at all means that there is no credit history. This does not augur well for the consumer as a bank will be wary of lending to someone who has no past record of servicing loans or credit card debt.

Applying for each loan offer that I come across will be good for my credit score

On the contrary, applying for too many loans or credit cards will show you in negative light to a lender as you will be branded as ‘credit hungry’. In order to maintain a good CIBIL score, make sure that you apply for a loan or a credit card only when you need one and when you do make sure that you have the capability to make timely repayments on your credit line.

As you can see there are several misconceptions regarding credit scores. If you hold on to these notions, your CIBIL score is bound to take a hit at some time at the other. However having the correct information about credit scores and maintaining basic financial decorum will ensure that your CIBIL score remains intact and you get timely access to any kind of credit you need.

Photograph: Daniel Mennerich/Creative Commons

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.