Boost your credit score by making timely payments and avoiding overspending. Financial discipline will help you stay out of a debt trap

Although money may not be the only important aspect of our lives, it is certainly a key one as it significantly lessens financial worries. This, in turn, enables us to have more control over our lives, freedom to carve our own path and fewer constraints on our choices. But many a time, we do not have enough finances to spare for some of our needs and that’s where banks and Non-Banking Financial Companies (NBFCs) step in to bridge this gap through credit or loans. And the amount of loan that we can get is directly proportional to our credit-worthiness. In simple terms, credit-worthiness is the extent to which a person or a company is considered suitable to receive financial credit, often based on their reliability in paying money back in the past.

 Who measures credit-worthiness in India then? There are several credit bureaus or credit rating agencies (CRAs) that generate scores by maintaining historical information of the credits of an individual and business and generate reports. This information is gathered from different lenders and other financial sources and the reports generated by these CRAs have relevance for different banks and other financial organisations. This is because these reports help the banks and other lenders profile their customers and take better decisions before approving their loans or credit. There are six major CRAs in India, namely, Credit Information Bureau (India) Limited (CIBIL), Equifax, Credit Rating and Information Services of India Limited (CRISIL), ICRA, Experian and the CRIF High Mark Credit Information Services Private Limited, registered under the Securities and Exchange Board of India (SEBI).

Among all, CIBIL is one of the most popular credit rating agencies in India. Its popularity is such that individual credit rating is known as the CIBIL score and people are really interested to know their CIBIL report.

An individual is scored on the scale of 300 to 900, where 300 is the lowest rating and 900 the highest. The higher the CIBIL score of a person, the greater are his/her chances of getting loans and credit cards easily. Some of the products offered by CIBIL are Credit Information Report, CIBIL TransUnion Score, Market Insight and so on. For organisations, one can get CIBIL Bureau Analyser, Portfolio Reports, CIBIL Company credit information report and so on. Most of the times it takes only one week to process the credit report from CIBIL. For any individual, maintaining a good credit score is vital if he/she wants to apply for loans or credit cards and it is important to stay in good standing. Here are some tips to achieve this:

Always pay on time: Timely payments of your debts are most crucial for having a high credit score. To stay on top of your payments, set up a calendar reminder or enrol in automatic payments. The on-time payment goal applies to all bills, including utilities, rent and cell phone service. Any missed payments can have an impact on the credit score for several years.

Pay all loans equally: Both revolving debt, like credit cards and long-term debt like mortgages or home loans, have an effect on the credit score. It is recommended that we should not prioritise one type of repayment over the other. It has been seen that having a high balance on the credit card over a long period of time lowers your credit score.

Old is gold: If you have a good payment track record, it adds to your credit score. So be very careful in wanting to close your old credit cards.

Pay in full: Making minimum payments on your credit cards is not advisable as this tends to drag the whole process, which in turn can lead to high interest payments. Try to pay in full whenever it is possible. However, if the minimum is all you can manage, make sure you pay at least that every month, otherwise you’ll have late or missed payments on your report.

Optimise your credit utilisation ratio: This is the ratio of credit card balance to the credit card limit. And the general thumb rule is to stay below 30 per cent for each card and on the overall basis (total balance on all cards divided by sum of credit limits). Credit utilisation ratio can improve by reducing the balances owed and maintaining or increasing the amount of credit available.

Follow a 20/10 rule: On a yearly basis, the credit card debt should not be more than 20 per cent of the total yearly income after taxes. And your monthly credit card payments should not be more than 10 per cent of your monthly take-home pay.

Make a repayment plan: If your debt is rising, take concrete actions. Stop using your cards and develop a monthly repayment schedule and most importantly, stick to it.

Overall, to maintain a good financial health and not suffer any financial distress, a disciplinary approach is very crucial. Boost your credit score by making timely and consistent payments and avoiding overspending. Financial discipline will go a long way to help you stay out of a debt trap.

 (The writer is Associate Professor, Amity University, Noida)