When it comes to taking credit a balanced approach is necessary. Being too credit hungry or too credit averse is not a good idea. If you apply for too many loans, you get a slightly lower credit score. Similarly, if you are too credit averse and do not have any loans, it means you don’t have a credit history, which makes it difficult for credit agencies to predict your repayment behaviour. They don’t have enough dope on you to give you a proper score. This means you get a negative score, notes a report published in Business Standard today.
Usually, a credit rating agency takes into account at least a couple of years of credit history to give you a credit score. “A minimum of six months of recent credit history is required for generating the CIBIL TransUnion Score on a borrower,” Harshala Chandorkar, senior vice-president, consumer relations, CIBIL, has been quoted as saying in the report.
This means, if you have paid off and closed a credit card or a loan a few years ago and don’t have any credit cards running at present you may not really get a credit score, apart for a value-1 mentioned on our credit report, which means “No history”
But should you really bother?
Whenever you apply for a loan with no credit history or creditworthiness reflecting on your credit report, you need to be prepared to for a few things. First, to ensure that you are not a bad borrower, banks will ask for more information that those who have a credit history. Banks will also have more checks and balances in place while assessing your repayment capacity. This will delay your loan approval process. Remember credit rating agencies also see if you are looking for too much credit and the type of credit. So, if you have too many loan enquiries within a short time or too many unsecured loans, this would work against you. Read the full Business Standard story here.
So, what should be your strategy if you plan to take a loan to buy a house or a car? A little bit of advance planning is a good idea. Ensure that at least for six months to a year before you apply for a loan, you pay off a few loans. Even any other unsecured loans, such as credit card dues. Also ensure that you service EMIs for all other loans regularly and not miss any payments.
And for those who have no credit history, getting a co-applicant while you apply for a new loan makes sense.
Firstpost Take: Getting your credit history in order is a good idea. Paying your dues on time always helps. But in doing so, do it the right way. By paying in full and not by taking settlements on the loan/ cards. Taking a settlement on your existing credit card or loan is possibly the worst thing you can do. “Settlement of an account” means when the lender is willing to take a lower amount than the total amount you actually owe. Settlements may sound good as they seem like you are saving money. But such settlements have a negative impact on the report. Also, get your credit reports from multiple bureaus, like CIBIL, Experian or Equifax and look for any discrepancies.