Uh oh…remember when a 650 credit score was deemed sufficient to secure the best rates and terms on credit cards, auto loans, home loans, and so on?Well, not anymore! You can also the join the club of high credit score by simply following the practices listed on our infographic and climb all the way to become an achiever.
The Credit utilization ratio is one of the key ingredients in determining your credit score, so it’s crucial to understand how it works. After all, a good credit score can qualify you for higher loan amounts and lower interest rates, while a low credit score can make it difficult to reach your financial aspirations. In this blog, we’ll try to cover everything you need to know about credit utilization, including:
• What is the credit utilization ratio?
• How is the credit utilization ratio calculated?
• What is a good credit utilization ratio?
• How to improve the credit utilization ratio
Let’s Begin With What is Credit Utilization Ratio?
Your credit utilization rate, sometimes called your credit utilization ratio, is the ratio of your credit card outstanding to your credit limit. They can impact up to 20-30% of a credit score, depending on the scoring model being used. If you never use your credit cards and there’s no balance on them, your credit utilization would be zero. If you typically carry a balance on one or more cards, you are ‘utilizing’ some of your available credit—lenders and credit bureaus will take note. While a one-off higher utilization rate for your credit cards may not really impact your credit score, your credit score will certainly be impacted adversely if the credit utilization rate continues to be higher on a regular basis.
How is the Credit Utilization Ratio Calculated?
Credit utilization ratios can be calculated for each credit card (card balance divided by card limit) and on an overall basis (total balance on all cards divided by the sum of credit limits). For instance:
|Balance||Limit||Credit Utilization Ratio|
Total Credit Card Balance / Total Available Credit = Credit Utilization Ratio
Total credit utilization ratio in this case will be 40%.
What is a Good Credit Utilization Ratio?
The general rule of thumb with credit utilization is to stay between 30-40 percent. This applies to each individual card and your total credit utilization ratio. Anything higher than the above-mentioned percent can cause a dip in your credit score as lender relate this to a credit hungry behaviour. This doesn’t mean that one cannot ever cross 40% of the credit utilization on any card. The impact on credit score is more only if high utilization seems to be a common pattern over last 6-12 months.
Finally, improve your credit utilization rates and eventually your credit score through these smart moves:
1. Paying credit cards on a more frequent basis – While you may be using your credit cards for availing the card benefits on different transactions, try to reduce your credit card outstanding by more than minimum each month and paying more frequently. For example, even while the credit card statement is generated on a monthly basis, you may keep paying your credit card outstanding every 10 days. As such, your credit limit will keep getting replenished and thus, your credit utilization rates will be visible as low.
2. Availing a Higher Credit Limit – Just in case you believe that you can effectively toggle between credit card dues and your regular payments, you can ask for a higher credit limit from your bank. Given the current credit card usage remains to be the same, the credit utilization rate will automatically reduce as the usable limit has increased. However, in such times, you should be careful that having a higher credit limit may also tempt you to spend more.
3. Using Multiple Credit Cards for Managing the Limits effectively – In case you are holding multiple credit cards, try to use different cards for different transactions instead of using a primary credit card for all the transactions. Accordingly, you will have a lower credit utilization rate across all the credit cards, instead of having a very high utilization rate for one card and very low/ nil utilization for the other cards.
4. Leave cards open after paying them off- By paying off the card, you’re reducing your total balance. By keeping the card open, you’re maintaining your total credit limit—thereby lowering your credit utilization ratio.
There are four credit bureaus in India from where you can download your credit report and find out your credit score. By law, you are entitled to a free credit report from all the four credit information companies at least once a year. Alternatively, you can also check your credit score either free of cost from online websites which have tied up with one or more of these credit bureaus. Let’s find out how you can get your CRIF credit score in 3 easy steps!
With e-commerce websites running fantastic discounts 24x7x365, shopping has ceased to remain a ‘festive activity’ and has instead been replaced by a year-long affair. Buying behavior has inclined towards becoming more impulsive than ever with the continuous bombardment of notifications tempting customers to buy at the best discounted price. Although on the surface it seems like you have saved a goodly amount with a lucrative deal, in reality, you end up buying stuff which was not even required in the first place.
One such scheme that has gained popularity in the recent past, especially in the white goods sector, is the no-cost EMI or zero cost EMI scheme. It is not uncommon to hear someone happily buying a mobile phone or a television or an electronic appliance which they initially thought impossible, using the zero cost EMI offer. But is this really a great deal or a smart trick? Let’s find out!
What is a No Cost EMI?
What is the first thing that strikes your mind when you hear the phrase, No Cost EMI? No interest payments involved. Isn’t it? You feel it’s a no interest loan. But it’s not. No Cost EMI is a loan involving interest payments. On availing No Cost EMIs, your bank enjoys a discount in the form of interest. The Reserve Bank of India (RBI) in its circular in 2013, has said that the concept of zero percent interest is not valid. This means the banks are clearly not entitled to provide loans at a zero percent interest. Then how are the retailers running this offer?
How Does This No Cost EMI Scheme Work?
There are two ways in which these schemes operate. One of the common ways is to forego the discount and instead pay this amount to the bank or financial institution to cover the interest cost. Another one is by adding the interest amount to the price of the product. Let’s look at these schemes in a bit detail:
a) When discounts equal interest: The most common way through which retailers offer ‘No-cost EMI’ is by offering discounts equivalent to the total amount of interest to be paid. Suppose you want to buy a phone that costs Rs 30,000/-. Under the 3-month EMI plan, at an interest rate of 15%, you would have to pay an interest amount of Rs 4,500. But in Zero Cost EMI, you are exempted of discount and you pay the original price of the Smartphone in EMIs. What does this mean? But if you make an upfront payment, the Smartphone would cost just Rs 25,500. You get it at a discounted price of Rs 25,500. If you opt for the No Cost EMI, you end up paying Rs 30,000. You don’t get the Rs 4,500 discount which goes to pay interest on the loan. The total price you pay on the Smartphone is split into money paid to a retailer and interest paid to a financier.
b) When the interest amount is added to the product price: Another way in which such schemes work is by adding the interest amount to the price of the product. Let us say the product costs Rs 15,000. The retailer lures you to buy this product under the ‘No-cost EMI’ plan for Rs 17, 250. Here the interest of Rs 2,250 is already added to the cost of your product and will be paid by you in installments. Therefore, if you have taken a three-month EMI plan, then the amount payable by you will be Rs 5,750 per month. Sometimes the Rs 2,250 may be covered as the processing fees.
Should you opt for No Cost EMI? You can opt for No Cost EMI if:
• You want to buy an expensive or popular product which now is beyond your budget.
• You don’t want to spend in one go or do not have enough cash to make an upfront payment.
• You are getting a good deal by availing an additional discount.
• You want to start building your credit history and credit score by availing a short quick consumer durable loan.
When you opt for a loan on No Cost EMI option you should also be careful about the down payment and processing fees, if any. Read the fine print and terms and conditions carefully. The retailers don’t offer this scheme on every product that they sell. Also, if you do not have a credit card of the relevant bank that offers the scheme, you can’t get the No Cost EMI deal if it is attached to the credit card. The credit limit on your card gets blocked too for the entire transaction value even though you are liable to pay just the EMIs. There are other financiers who give such offers to consumers with no credit cards or even with no credit scores. Such financiers have people in store to support you with the processing of loan within 5-10 minutes. The offer may sound lucrative but if not used carefully it can affect your financial budgets and ultimately your credit scores!
Be Wise, Be Happy!
Personal loans are a popular form of borrowing for home remodeling, vacation travel, weddings and emergency situations. There are number of lenders in the market who will promise to offer you Personal loan at attractive interest rates. But before opting for a personal there are many things that everyone should know and be clear about. Some of these are- is a personal loan really required, if yes then how much and what should by my credit score for personal loan etc? Follow our 7 golden rules to bypass the loops of EMIs and accumulative repayments while maintaining a healthy credit score:
An error on your credit report could lead to lower credit scores and impact your chances to open a new credit account or get a loan. Errors can occur surprisingly easily on your credit history. It may be that your handwriting was hard to read on a loan application, that a lender mixed up account information, or that you were a victim of identity theft. With so many ways an error can occur, it is indispensable to check your free credit score for accuracy periodically ― not just when you need a loan.
However, due to a lack of understanding of credit, it can be difficult to determine what factors may affect your credit score and the steps you need to undertake to dispute your credit report. This is also one of the reasons to educate yourself with the concepts of credit score and credit history. Once you’re familiar with your score, if you do find an error in your credit report there is thankfully a way to dispute the inaccuracy.
The fastest way to start a credit report ‘dispute’ and check your status is by applying online. Disputes are 100% free and require no fee. However, credit reporting agencies are used to receiving many disputes on a daily basis, mostly from people who are just trying to get something legit removed from their reports. Hence, you must be sure about your point and support your dispute with documents.
Following these steps, you may be able to win your credit dispute and get your credit history back on the right track:
Step 1: Download your credit report
First off, you need to download the detailed credit information report from any of the credit bureaus in India such as CRIF High Mark. You are entitled to download one free credit report each year.
Step 2: Inform the credit bureau
Once you are sure about the discrepancy in your report, you have to make it known to the 4 credit bureaus on their respective websites and postal addresses. This information has to be shared in the form of online appeal and in writing via a letter. The letter should clearly contain each item in your report that you dispute. You need to state the facts and explain why you dispute the information and wants it removed or rectified. The letter should be supported with copies of documents verifying your dispute. Always ‘request read receipt’ for your letters.
Step 3: Contact the Lenders
To ensure the errors are resolved at the source, it may also be a good idea to contact the lenders who supplied the incorrect information to the bureaus. Lenders, also known as furnishers, are the companies that provide the information to the credit bureaus. They include banks and credit card issuers. You can go to the furnisher and ask them to correct the mistake in case it is apparent that the mistake is rectifiable at their end. But if the error is an identity-related mistake made by a credit bureau, it may not necessary to contact your lenders, you can to the bureau directly.
Step 4: Count 30 days
The credit information companies are required to investigate your claim of dispute which generally lasts at least 30 days. During this time, the item on your credit report which is under dispute will be temporarily removed from your credit report. After they have finished their investigation, the bureau is also required to provide you with a free copy of your credit report if it has now changed. While the process can be time-consuming, it is important to continue to dispute incorrect information on your report that negatively impacts your credit score. You can also ask the credit bureau to include information summarizing the dispute on your credit report so future lenders can see your claims and assess them for themselves.
Step 5: Check your credit report:
Updates to your affected credit reports may take some time to appear. It is dependent on the specific credit bureau’s update cycle and when the lender sends the new information to the credit bureau. If the update doesn’t appear on your credit reports within several months, contact the credit bureaus and the lender to verify it’s reporting your account information to the bureaus.
A bank or any other lender evaluates a potential borrower before granting a loan and handing out the money. This evaluation can be called credit risk assessment as the bank is trying to understand the risk of potential default by the borrower on this line of credit. The Five Cs of credit is a widely popular framework which considers five characteristics of the borrower to helps lenders gauge the creditworthiness of the borrowers. Know more about them in our infographic below:
Credit bureaus aggregate the credit information provided by various banks and financial institutions on a monthly basis and records them in an individual’s credit report. This report has a complete history of your loan and credit card repayments, account usage and outstanding balances. It serves as a basis for the calculation of the credit score. Since banks use credit score and credit report to assess the intent and capacity of a loan applicant, it is necessary for every individual to ensure that the information in the credit report is up to date and accurate.
It is likely that the data reflecting on your credit report is not accurate or not up to date. The bank may have missed sharing all updates on your loan account with the credit bureau. Even if the bank has reported data properly, the credit information company may have missed updating or is yet to update it in your credit report. Such errors or misses on your credit reports can lower your credit score, which could hurt your ability to get new lines of credit or even make the terms of credit more expensive for you. Ultimately, these errors could be costing you money and may force you to postpone your aspirations.
You can begin reviewing your credit report by getting a copy of it yourself from the website of any of the four credit bureaus in India. Checking your own credit report or credit score doesn’t impact your score, so check it without any worry. Further good news is that you can request a free copy of your credit report once in a calendar year from any of these four RBI approved credit bureaus. And if you find errors, you can dispute the errors at no cost to you. Read more about How and When to Dispute Your Credit Information Report here https://blog.crifhighmark.com/how-when-to-dispute-your-credit-information-report/
Once you get your credit reports, review them carefully. You can use the list below to check for common errors and make sure your credit reports are accurate and up to date.
Are Closed Accounts Still Open?
A closed account means you have positively paid back all the loan or credit card dues, and the account is not going to see any future activity. While an open account is an indication that you still have some amount to be paid back or you have the credit line still available to you for use. Having old lines, those which should have been closed otherwise, on your credit report showing as open will show higher number of lines and higher credit amount available to you. This can impact your credit score and therefore your eligibility for a loan. So, if the closed accounts are being shown as open, it is time you report this error with documentary proof so that you can get it rectified at the earliest.
Are All Accounts up to Date?
Do check the last reported date on all your accounts. If the account is marked closed, the last reported date will be same or closer to date of closure. If the account is marked open, the last reported date should be within last 30-60 days. If any of the records are not updated, contact the credit bureau as well as the bank concerned. An out of date record will not present correct picture to another bank and may also impact your credit score.
Is There an Account That Does Not Belong to You?
If you notice any credit account under your name that you are unaware of, report immediately and get it removed from your credit report. This could be because of wrong reporting by the bank or an error at the credit bureau. Take it up with the credit bureau, and it will help you get it resolved.
Is There a Record of an Account Being Shown as Delinquent?
Delinquent accounts are those accounts which are way past their dates of payment. Typically, delinquency is reported as number of days past due date (DPD) which are shown for last 36 months for every credit line. For credit card accounts, delinquency is reported when the minimum amount due is not paid. Lenders might give you a leeway of a few days before reporting the delinquency. More than 3 months of missing repayments will automatically declare your account as NPA (non-performing asset or non-performing loan). Such accounts can bring a major drop in your credit score and distrust in the eyes of all the lenders. If any account is showing overdue or delinquent (if more than 30 days), review them more carefully. If you have already made the repayment, you must inform the bank to report it to all credit bureaus as well.
Is the Same Debt Being Recorded More Than Once?
Did you know that 30% of your credit score is made of the debts you have taken? The number of debts you have taken matters a lot when it comes to your credit score. More debts in your name will result in difficulty in getting further credit. If your loan account or credit card has been reported twice then you will have fewer opportunities to avail credit. It is also likely that while 2 credit lines are shown, only one is being reflected with good credit history and another one as delinquent. Make sure to check your credit report every time you take a loan from the bank so that there are no such errors on your report.
Is it About Incorrect Credit Limits?
To maintain your credit score, the credit utilization ratio should be a point of significance to you. When it goes high it shows an individual’s higher dependence on credit. Makes sure the credit limit on your credit card is accurate and not lower than the actual limit. Report to Credit Bureaus like CRIF to rectify in case if it is reported wrongly.
Incorrect Balances in your Loan Accounts?
If a higher outstanding balance than actual is shown, you may lose out an opportunity to avail credit since the bank may assume you to have higher credit available with you than actual. Make sure correct loan account balances are reported in your credit report.
Are there any Identity Errors on your report?
Identity errors may lead to many more errors on your credit report and credit score. These occur because of wrong information reported by the bank, the mismatch between PAN and your name or due to identity theft.
• Wrong Information: When there is a mix-up in two customers at the bank end or at the credit bureau end, loan and credit card information pertaining to some other person may have been reported against your name. The mix up could be due to same phone numbers, or mix-up in PAN or similar names/addresses etc.
• Mismatch: This could be particularly possible if you have undergone a name change in your PAN account or use different forms of a name like only with initials for certain accounts and expanded forms in other accounts.
• Identity Fraud: Fraud on your report is the most serious concern. Fraud means that someone is using your personal information to open accounts in your name. If you suspect identity fraud on your report, you will need to alert the bank concerned and the credit information company. Once it is established as a fraud, it should also be reported to the local police.
Achieving a good credit score is an iceberg. There is what people see on the surface: lower interest rates, faster loan approvals, enhanced credit limit. Then there is what people don’t see hiding below the surface: consistency in payments, maintaining a low credit utilization ratio, limiting loan applications, tracking credit report regularly. The key to the ‘Credit Score Illusion’ is creating balance in your financial life. Take a look at our image and note down the things that resonate with you!
Three digits that have the power to shape your world: your credit score. The higher the score the better are your chances of dreams becoming true. Not only you will have easy access to loans but will also be offered lower interest rate, which means taking the loan will cost you less overall and you could save a substantial amount over the course of a lifetime.
And when something impacts your life that much, don’t you think you should be familiar with it? The sad story is that tens of millions of Indians are taking a blind approach to their money. Everyone wants their finances to be in good shape, but only a few tend to work towards maintaining a good credit history.
Here we list down 5 important and basic questions about credit score to get you started:
1. What is on a credit report?
The short answer to that question is: A lot! A typical credit report will include personal identifying information: a list of credit accounts (including credit limit), type of account (credit card, home loan, auto loan, etc.), and your payment history on those accounts. Each of the four major credit reporting bureaus compiles data from sources such as banks, NBFCs etc that extend you credit. Based on all this data, companies may calculate a credit score to reflect your creditworthiness. Since each of the credit reporting bureaus provides a score, you may have at least four scores. Bits and pieces of your credit history may vary slightly among the four companies because not all businesses supply information to all three agencies. However, the broad picture of your credit history should be relatively consistent.
2. What Types of Information Can Impact Your Credit Scores?
The two most crucial factors that affect your credit score is your repayment of the loan and how timely you pay your EMIs and card dues. If you are a month late in paying your dues, then your credit score might drop by 80 points. Next up is, credit inquiries. They can affect your credit score in a major way. There are two types of credit inquiries, soft and hard. Soft Inquiries are harmless to your credit score but the hard inquiries that are often done by lenders before lending money to you can bring a change in your credit score even if you do not get the loan in the end.
Opening new credit accounts can or taking new loans also affect but it can be fixed with regular and timely repayments. Lenders evaluate the credibility of the borrower at their own discretion. They may use whichever scores they’d like and measure those scores on a scale that is unique to them. It’s also possible that they may not even consider credit scores at all but just the contents of the credit report.
3. Your Score Is Less Than 700. Now What?
Check your credit score yearly, at least to avoid surprises! With CRIF you are entitled to one free credit report every year. And no, your credit won’t take a blow if you do this – it’s considered a “soft” inquiry. If your credit score is lower than 700 then you should dig deep in your credit report and find out the reasons for bad credit score. Look at your credit card balances and credit utilization ratio. The closer you are to hitting your maximum limit, the more it may lower your score, so pay down those balances if you can. Check out for errors/information listed in the credit report not undertaken by you, in that case, you should immediately report to the credit bureau or the banks to update your information.
Abruptly closing your credit cards with a long credit history can affect your credit score in a negative way. How long you’ve been borrowing affects your score. The longer the better.
4. How long does a bad credit rating last?
Debts have a finite duration, and so does negative information that appears on your credit report. All negative information on the credit information after 7 years often start to value less for the credit score. Make sure all your payments and your credit activities are timely and regular to show stability in your credit behaviour and eventually pushing your credit score towards the good side.
5. Who Can See Your Credit Report?
Your credit report information is not available to the public and can be accessed only you’re your permission. When you apply for a loan and credit card then your permission is required as the lenders and banks need to investigate the information to determine your creditworthiness and your potential and ability to pay back the borrowed amount.
Now that we have explained the basics of Credit Score, wait no longer, follow these steps and start building a good credit history now!