The Reserve Bank of India (RBI) recently reformed the credit score process. Let us take a look. Lenders need to notify customers whenever a bank or non-banking finance company (NBFC) checks their credit report. This notification can be sent through SMS or email. Lenders need to convey a clear reason for the rejection of loan requests.
“Before reporting a default, loan providers must let the customer know about the default. This notice can be sent through SMS or email to keep the customer informed in advance," says Priti Rathi Gupta, Founder of LXME, a financial platform for women.
Also, as per RBI, credit companies must offer a free full credit report annually. To facilitate this, credit companies need to include a link on their website for users to access their credit reports. Finally, complaints need to be resolved promptly. “If a Credit Information Company (CIC) fails to address a customer's complaint within 30 days, it will be required to pay a daily fine of Rs 100 for each day beyond the deadline,” says Gupta.
This will empower individuals to identify areas for improvement and take concrete steps to boost their scores. “This will lead to faster loan processing and reduced lending risks. With better credit scores, individuals and small businesses will be able to access credit at competitive interest rates,” says Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner at WealthWisher Financial Planner and Advisors.
When it comes to credit scores, there are a lot of myths prevailing.
Let's take a closer look at some of the most common misconceptions and set the record straight.
“When you check your credit score for yourself, that is a soft check. You can do it on a credit bureau website. You can do it on the bank website. Also, there’s a hard check that you need to be aware of, in which you complete a loan application online and a financial institution does a hard check,” says Adhil Shetty, CEO, BankBazaar, a fintech portal.
Myth 1: Checking your credit report will lower your credit score
In reality, checking your credit report is a soft inquiry and has no impact on your credit score. It's a great way to ensure your report is accurate and up-to-date.
Myth 2: Applying for multiple credit cards or loans at the same time will significantly lower your credit score
Hard checks won't have a lasting impact on your score, but you should avoid making multiple inquiries if you do not need them.
Myth 3: Closing old accounts will improve your credit score by reducing the amount of available credit
In reality, closing old accounts can harm your credit utilization ratio and credit history. “A suitable mix of credit usage is good for credit scores. This is the way to show lenders you can manage credit responsibly over time,” says Krishna.
Myth 4: Being married or in a long-term partnership will combine your credit scores or affect your credit score
Your credit score is individual and not affected by your marital status or partnership.
Myth 5: Having a high income or being employed will improve your credit score. “Credit scores are determined by credit behavior, not income,” says Gupta. Credit scores are based solely on your credit history and payment behavior, not your income or job status.
Myth 6: Paying rent or school fees on time will help improve your credit score. “Unfortunately, rent, school fees, dues, and payments are not typically reported to credit bureaus,” says Krishna. This may change in the future if schools and landlords start reporting your credit history with the bureau.
How Often Should You Check Your Credit Score
The ideal time is every three to six months. This will help you catch and correct any errors or inaccuracies on your credit report before they negatively impact your score. Let us take an example.
“When a credit card company merges with another credit card company, if you have a hanging credit line still reporting from the previous credit card issuer, it will show 2x of your credit transactions. That will have an impact on the score. So you have to take your report and proactively approach your credit institution to close those accounts from being reported to the bureau,” says Manish Jain, Country Managing Director, Experian India.
According to Ravindra Rai, Deputy Managing Director, BOBCARD, a wholly owned subsidiary of Bank of Baroda, a customer should check their credit score at least once a year to monitor accuracy, detect potential fraud, and understand their overall credit health. "Regular checks help ensure your financial records are correct and identify any unauthorized activity early. However, if you're keeping a close eye on your credit or preparing for a significant financial move, like applying for a loan or mortgage, it's advisable to check your credit score more often, perhaps every few months,” he adds.
Hence, you should track changes in your score. Also, be alert to detect and respond to potential identity theft or fraudulent activity.
