Many of us review the progress of our goals regularly, which may include financial, health, career, and other goals. While reviewing the financial goals, it is important to review our credit profile. As it is an important goal, the credit profile may be reviewed as part of financial goals or as a separate goal. In this article, we will understand how to review our credit profile and some steps that can be taken to strengthen it.
Credit profile review
During their lifetime, an individual may deal with a number of credit instruments, like loans and credit cards. Getting these credit instruments requires an individual to have a good credit score and an overall good credit profile. Hence, it is important to review the credit profile regularly.
If the individual’s credit score is lower than optimum, a credit profile review can help identify the steps to be taken to improve the credit score. If the individual’s credit score is good, a credit profile review can help maintain or improve it further.
A credit profile review may be done once every quarter or half-yearly. During a credit profile review, the following are some steps you can take to strengthen it.
1. Review of existing loans
You may have existing loans like a home loan, a vehicle loan, a personal loan, etc. During the credit profile review, check your progress so far on the loan repayments. Check if you need to make any partial prepayment(s) or foreclose the loan before the schedule. If yes, make a plan on how much you want to prepay and the source of funds you will use for it.
You may be expecting a performance-based incentive or annual bonus from your employer, maturity proceeds from any investment(s), etc. If any such lump sum amount(s) is expected, check whether you need to allocate a certain percentage or the entire amount towards loan prepayment.
If you have multiple loans running, check which loan you plan to use the lump sum amount for or how you plan to distribute it among multiple loans.
If you want to take any new loan, like a home loan, vehicle loan, personal loan, etc., in the near future, make a plan for it. Decide on the loan amount, how to make the down payment, incorporate the EMI in the monthly budget, etc.
Calculate your debt-to-income (DTI) ratio after considering the new loan that you plan to take. The DTI ratio measures the percentage of income being used to service debt obligations. Banks consider a DTI ratio of 35% or lower as good. Some banks consider a DTI ratio between 36% and 50% for loan applications. Getting a loan with a DTI ratio beyond 50% may be difficult.
So, during a credit profile review, you must check the repayment progress of existing loans, plan for partial or full prepayment (if required), and plan for new loan/s (if required).
2. Handling multiple loans
Handling the repayment of multiple loans can involve time and effort. If you have multiple personal loans running, check if you would like to consolidate them into a single loan. Instead of having multiple EMIs going out on different dates, having a single EMI with a consolidated loan can streamline the process.
Have you taken a personal loan(s) at a higher interest rate and find it challenging to manage the EMI? You may consider options like balance transfer (BT), loan restructuring, etc. However, these options may involve fees, like a foreclosure fee by the existing bank, a processing fee from the bank providing BT, etc.
If you plan to continue with multiple loans, consider strategizing their prepayment. You may consider strategies like the snowball or avalanche strategy for repayment. In the snowball strategy, after paying the EMIs for all loans, any remaining surplus amount is used to pay off the personal loan with the smallest outstanding amount. Once you pay off that loan, your number of loans will reduce by one, and you move on to repay the personal loan with the next smallest outstanding amount.
In the avalanche strategy, after paying the EMIs for all loans, any remaining surplus amount is used to pay off the personal loan with the highest interest rate. It helps in reducing the overall interest burden. Once you pay off that loan, you move on to repay the personal loan with the next highest interest rate.
3. Review of existing credit cards
In the earlier section, we understood how to go about doing a review of loans. During a credit profile review, the next step is to review your credit cards. Banks regularly evaluate their credit card reward programs. During the evaluation, they may announce a reduction in the reward rate on specific categories, exclude specific categories from rewards, add convenience fees on transactions in specific categories etc.
After some of these reward program devaluations, you may find the credit card is no longer attractive compared to other credit cards. You may have stopped using some credit cards after the reward program devaluation. However, these credit cards may entail an annual fee. While reviewing existing credit cards, if you come across any such cards, you may cancel or close them.
4. Adding new credit cards to the portfolio
Banks regularly introduce new credit cards with attractive features and benefits. During the review, if you come across any such new credit card(s), you may add them to your credit card portfolio. You may design a credit card portfolio of 2-4 cards, as one card may not cater to all requirements.
These days, we have category-centric credit cards focused on travel, movies, utilities, food, etc. For example, the Axis Bank Atlas Credit Card is a travel-centric credit card, the HDFC Bank Swiggy Credit Card is for foodies, the RBL Bank Play Credit Card is for movie buffs, etc. So, you may need multiple cards in your portfolio, with each credit card catering to a specific requirement(s).
5. Credit utilisation ratio
The credit utilisation ratio measures the percentage of credit used from the credit limit allocated. For example, if you have a credit card with a Rs. 1 lakh credit limit and use Rs. 60,000, the credit utilisation ratio will be 60%. The credit utilisation ratio impacts your credit score.
If your credit utilisation ratio is 30% or less, it contributes positively towards your credit score. However, if your credit utilisation ratio is more than 30%, it contributes negatively towards your credit score. So, during the credit profile review, you must check your credit utilisation ratio.
If the credit utilisation ratio is more than 30%, you must take steps to reduce it to 30% or below. If you have received a salary hike, you may share the salary slips with the bank and ask them to increase the credit limit on your credit card. With a higher credit limit and the same monthly expenses, your credit utilisation ratio will decrease.
6. Safeguarding credit profile
According to the RBI Annual Report, in FY 2024-25, bank frauds in India tripled to Rs. 36,014 compared to Rs. 12,230 in the previous year. The loan-related frauds formed 92% of the above amount. Hence, you must take steps to safeguard your credit profile from any potential financial fraud. You must ensure you don’t share any OTP with anyone posing as bank representatives, avoid doing financial transactions using public Wi-Fi, review your credit report regularly, etc.
While reviewing your credit report, watch out for any incorrect entries, any loans/credit cards that you have not applied for, any credit cards that you have closed but are still being shown as open, any inquiries for credit cards/loans that you have not applied for, etc. If you come across any of these in your credit report, take it up with the respective bank for corrective action. Regular credit report monitoring will ensure it is free from any inaccuracies, frauds, etc.
Benefits of reviewing your credit profile regularly
Reviewing your credit profile regularly is an essential exercise that individuals must do. A good credit profile can help you accomplish your financial goals. For example, with a good credit score and report, you can take a home loan to purchase your dream house, a car loan to buy the car you have always aspired to, a personal loan to enjoy a much-needed luxury vacation with family, etc. A regular review of your credit profile helps you to strengthen it. Apart from providing you access to loans, a strong credit profile can help you with other benefits, like lower interest rates.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.