In this blog post, Swati Mohatta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses what credit rating is and what are the factors that might affect the credit rating.

There is too much debt floating around in the world today, and people are greatly underestimating the importance of keeping and maintaining a strong credit rating. If we are not diligent when it comes to making our purchases and fulfilling our financial obligations, credit rating can take a substantial hit and our ability to perform a range of financial transactions in the future can be seriously affected.

Credit rating systems

The credit reporting system takes into account not only the negative information that is currently on a person’s credit file but also the positive factors. So everything goes into account when determining the sort of score we have on your file.

In India, the average of credit score that lies between 622 and 1200 is considered to be pretty good. Any higher, we are on the right track, any lower and we might have a bit of work to do when it comes to getting our credit rating up to an acceptable level.

Negative credit information

There is a range of information associated with our financial history that offers insight into our creditworthiness. These are taken into account in determining  our ultimate credit rating:

• Any credit applications and inquiries we have made in the last five years, and whether or not these applications have been successful or unsuccessful and why.
• Payment records from our current credit accounts. Not only does this include our credit cards, but it also includes our mobile phone, gas and electricity accounts.
• And overdue accounts or payment defaults in our history and any failure to meet payments.
• Any bankruptcies or insolvencies we are involved in as well as court judgments.
• A range of public record information, including directorships and proprietorships.

Positive credit information

In India, there is a range of positive credit information that can significantly increase our credit rating and overall perception of creditworthiness – so long as we have been in control of our finances. Some positive factors include:

• The types of credit accounts we have owned such as a credit card or home loan and the record of successfully meeting financial obligations about these accounts.
• Credit limit usages and account balance details.
• Successful repayment history which shows an overall ability to meet our financial obligations.

Ways we can increase our credit rating

It is said, that if we find ourselves with a low ranking– there are some measures we can take to improve our score significantly. These include:

• Applying for a credit card

As long as we are in a position to make repayments, having a credit card can increase your credit rating. Just make sure you take care of all your repayments on time, and avoid charging too much to our credit card.

• Make appropriate applications for credit

Submitting multiple loan applications and having them rejected can have a substantial impact on our overall credit rating, so if we need to make a loan application make sure we do your research first and make sure we are definitely in a position to do so. If we have made multiple inquiries in a short amount of time, some credit providers may look upon it negatively and this will seriously affect your rating.

• Paying off bills, loans or credit cards

Making sure we have met all our different financial obligations is quite important when it comes to determining our overall credit rating. If we fail to do so, it can have a negative impact on our credit rating. Something as small as a 30-day late payment can decrease your credit rating, and overdue accounts are kept on your file for up to five years, so it goes without saying – don’t risk it; pay on time.

• Keep track of our credit report and rating

This is especially important if we have changed jobs or moved house recently, and we should be checking our credit rating at least every one to two years to ensure there are not any errors that have passed through.

The things we do that affect our credit score and how do we  fix them

 Applying for credit several times

This usually involves submitting loan applications to several banks, hoping that one of it will be approved. However, each time we apply for credit, it will be recorded in our credit report, which is noted as an inquiry. Credit can be a loan, mortgage or utility application. If we have made a lot of inquiries in a short amount of time, some credit providers may see this negatively and reject our application.

If we continue to apply for credit after we were refused it from a credit provider, these inquiries will significantly reduce our credit score. The Solution is that before applying, research different lenders and choose the most appropriate one to submit our credit application to.

Paying our bills, loans or credit cards late

An overdue debt and whether we have paid it on time or not will be listed on our credit report when it is 60 days or more overdue. However, a 30-day late payment may also decrease our score. Overdue accounts are kept on our file for up to 5 years.

The Solution for such circumstances is pay on time, every time. But if we really can’t, make sure to at least pay off an overdue debt within 60 days of getting the first notice of payment so that it doesn’t appear on our credit file. Also pay down our non-overdue debts gradually, as our credit score shows our ability to manage our credit and debt, so if we pay it completely at once, it will be deleted from the report. Hence we can pay our bills, loans and credit cards on time, by using direct debit and schedule automatic payments from the account.

When we are not paying our bills or meeting loan repayments

If we refuse to pay our phone bill even after receiving further requests from our utility provider to do so, or we don’t meet our loan repayments, we could risk having these listed as an overdue debt or defaults on our credit report, which will bring down our credit score. Defaults are kept on your file for up to 7 years.

It could be better off paying the bill and then disputing the amount after that. However, if we can’t pay our bills or meet repayments due to unexpected circumstances, speak with utilities and credit providers and to see if we can apply for a hardship variation and negotiate a repayment plan. We could also consider consolidating our personal and credit card debts into our mortgage so we can manage to pay them off each month.

Not removing errors in our credit report

If we find an error on our credit report and choose to fix it later rather than sooner, our credit score will not improve and will affect our future credit applications.

So we can tell the privacy commissioner that there is an error on our file. If we are applying for a loan, we must our lender that a correction is pending.We will need to prove that the item is not correct, such as a letter declaring that the account is not ours or that it has already been paid. We could also talk to the company who added the default on our file, claiming that we owe money to them. They could have simply mistaken us as somebody else who does owe them money.

Not keeping track of our credit report

If we have changed jobs or moved house over the years, we could end up losing track of the details in our credit report, which could adversely affect your credit rating.

Other ways to improve credit ratings

• Get a credit card

If we have and use a credit card, it will build our credit rating and show that we are capable of handling and managing debt. However, remember that every credit we apply for will be added to our credit report and can lower our rating. If we already have a credit card, it’s best to ask for a higher credit limit instead of applying for a new card.

• Use different types of credit

We can increase our credit rating if we can prove that we can manage different types of credit and also pay them all on time. For example, using a loan to purchase a car and a mortgage to buy a house.

• Use someone else’s credit

Have someone with a good payment history add us as a credit card holder to their credit account. This way, their payment history will be included on our credit report as well, giving a perfect account. If the account is open for a long time, it will also show a long history of managing it well.

• Keep unused accounts open

Even if we have paid off our credit card, don’t close the account. Keeping the account open without negative reports over a long period will have a positive effect on our credit rating, therefore the higher our credit rating, the higher our chances are of getting our credit application approved.