06 Aug

Demystifying your credit score

 

Wondering what this score is all about? How can one number generate so much power? If credit is part of your modern life, then so is your credit score. If you think that you can just ignore your credit score, you might want to think again! You will be surprised to know how this number can affect several facets of your life.

CIBIL is India’s first Credit Information Company (CIC) and is the central recorder of the credit information of all borrowers.

CIBIL credit score or credit rating is, in short, a three digit figure ranging from 300 to 900 points which denotes a person’s credit worthiness. This score determines everything from whether you qualify for a loan, credit card and if you are admissible for rent to how much interest you will pay on your loan.

Lenders look at your credit score to assess their risk in lending you MONEY.

Lenders make their decision based on:

  • Your application form
  • Your credit report
  • Their lending policy
  • Your past transactions with them

Understanding what lenders are looking for and managing your credit score accordingly is the key to getting the credit you can afford. Let’s demystify the numbers that determine your credit worthiness.

What is in that credit score of yours?

Some common factors that make up a archetypal credit score include your bill paying history, your recent credit activity, the number of accounts you have, how long have your accounts been active, how much of the available credit are you using, whether you’ve had a foreclosure, a debt referred for collection or a bankruptcy in the past, credit balances, depth of credit, available credit, types of credit use and the length of credit history.

What’s not in your credit score?

Your credit score does not factor in such information as income, employment, age, sex, national origin, marital status and race.

If your score is not what you want it to be, you can take these precautionary measures to improve it:

  • Every time pay on time

If your payments continue to remain outstanding on an active credit account, lenders can close your account and collect all the outstanding balance. Under these circumstances your account will be marked as defaulted. If you make several late payments your credit account, lenders will consider the account to be ‘delinquent’. Do not miss payments to lenders even if you just have to pay the minimum balance. Missed payments negatively impact your credit score.

  • Reduce your credit balance

Lenders are cautious to extend credit to people with high credit balances. If you’re struggling to juggle payments, lenders will notice this. But if you’re using less than 50% of your available balance and are making your payments on time, it shows that you can well manage your credit. Banks and financial institutions will also look at your non-revolving balance trend (total balance in the last 3 months in comparison to 12 months ago) to see how you manage your finances over time and if your balance is increasing or decreasing. Keep your credit card balances well under the maximum available limit.

  • Don’t exhaust your available credit

Your ‘available credit’ is the difference between your outstanding balance and your credit limit. For example, let’s assume visit the nearest bank and apply for a credit card. If your card had a credit limit of Rs 50,000 and you had a balance of Rs 10,000 on it, you would owe Rs 10,000 and have available credit of Rs 40,000. This implies that you can make another Rs 40,000 in purchases.

Banks generally grant a larger credit limit to those who have a larger income and a good credit score. Alternatively, if your credit limit increases, it will enable you to obtain a higher credit score.

  • Settle outstanding accounts

If a credit account is closed or a loan has been repaid in full, the account is recorded as settled. Settled accounts have a positive effect on your credit score. It reflects how responsible you are in managing your accounts. If you have outstanding balances on a large number of credit accounts, it will indicate that you are excessively reliant on credit, thereby decreasing your score.

  • Age of accounts

Since credit score takes into consideration an individual’s credit history, hang on to those old accounts. They have positive effect on your credit score. However, new credit accounts decrease your credit score.

  • Credit Applications

When you apply for credit, a ‘credit search’ is recorded on your report. Numerous credit applications suggest that you are over-reliant on credit and this will have a negative impact on the way a lender views you. Do not apply for credit too frequently.

Credit scores need not be confusing – you just have to know how they work. Purchase your credit information reports regularly and check your credit history from time to time. This way you can study your report to ensure it is building up as required. Any variances can be corrected at the earliest and you can consciously engage in practices to raise your score.

 

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