Understanding the importance of your credit score and how to manage it

In today’s financial landscape, a good credit score is more than just a number—it’s the key to accessing better lending opportunities and managing financial health.

Satish Mehta, Founder of Athena CredXpert (ACX) and CIBIL’s first CEO, emphasizes how crucial it is to understand and manage your credit score.

Here we explain why your credit score is important and how you can keep it under control.

The impact of credit decisions on future loans

Your current credit decisions affect your future financial outlook.

“When you take out a loan or use a credit card, “This affects your cash flow,” says Mehta.

“Your ability to afford future borrowing is influenced by the loan you take out today.” As Mehta explains, borrowing changes your available cash flow, which can limit your borrowing capacity until your income or financial situation improves.

In addition, the new loan will affect your Credit score, influencing how future lenders perceive your creditworthiness.

The role of credit agencies

Credit agencies are essential in the debt process.

“A credit bureau is a central repository for credit data,” Mehta says.

In India, there are four major credit bureaus: Transunion CIBIL, Experian, Equifax and CRIF High Mark.

These agencies collect information from banks and financial institutions to create detailed credit reports and scores.

A good credit score can lead to better loan terms and lower interest rates, while a low score can limit your access to credit.

For businesses, maintaining a healthy credit profile is crucial to obtaining loans and expanding their operations.

“Credit bureaus have transformed lending in India, making the process more objective and data-driven,” Mehta adds.

This change has improved transparency and reduced non-performing assets, which benefits both lenders and borrowers.

Why it is important to perform periodic credit report checks

Even if you are not currently seeking credit, it is vital to periodically review your credit report.

Mehta advises: “Review your report periodically to detect any discrepancies or fraudulent activity early.”

You are entitled to one free credit report per year from each of the four bureaus.

Make sure all information is accurate and up to date to avoid unpleasant surprises when you need credit.

Improve your credit score

Improving your credit score involves a few key strategies:

On-time payments: “Your payment history is the most important factor in your credit score,” Mehta says.

Consistent and timely payments on loans and credit cards are crucial.

Credit Utilization: Keep your credit utilization ratio below 30%-40% of your total credit limit. For example, if your credit limit is ₹1,00,000, try to utilize less than ₹30,000.

Minimize hard inquiries: Frequent credit inquiries can lower your score.

Apply for new credit only when necessary and make sure you meet the eligibility criteria.

Maintain a diverse credit mix: Manage multiple types of credit products, such as credit cards and personal loans, responsibly to demonstrate your ability to handle different forms of credit.

Seeking professional help can also be beneficial if you are having trouble managing your credit.

“Credit repair services can provide valuable guidance,” Mehta suggests.

The role of credit scores in financial inclusion

Credit scores also play a crucial role in financial inclusion. “Credit scores help people who have never applied for a loan before,” Mehta explains.

These scores help lenders assess first-time borrowers, facilitating broader access to credit and promoting financial inclusion.

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