When it comes to credit reports, you should know that they have a huge bearing on your financial life not just in the short term, but even in the long run. In a nutshell, the interest rates you pay, for instance, on a personal loan can be determined by your credit score. For that matter, even getting the said loan or credit card approved in the first place is determined by your credit score.
This makes it more important than ever to build and maintain the score, because while a low CIBIL score may not be the end of the world, it can definitely have a negative impact on your financial future. Read on to know all about the important factors that affect your credit report. We will also discuss in this article, the routine you should follow in order to achieve a good or high score.
When a credit bureau calculates your credit score, here are some of the main factors that get considered:
Payment history – This is an important aspect that every lender will check when offering you credit. When you make regular, timely payments it reflects well on your credit score as a person who utilises credit responsibly. Delayed or missed payments cast a shadow of doubt on your willingness and ability to repay a loan, which can be critical to your next loan or credit card application.
Healthy credit mix – A diverse portfolio consisting of both secured and unsecured loans can impact your score positively. It’s also a good way for lenders to evaluate just how well you can handle all sorts of credit based on your past accounts. This also presents you as less risky profile to a prospective lender.
Low credit utilisation – It is suggested that you utilise no more than 30 percent of the credit limit assigned to your credit card, because the more you use, the chances that you are dependent on credit are higher. Using more than this amount raises a warning flag to a prospective lender.
Length of credit history – Do you have an old credit card that you aren’t currently using? Well, if it has been maintained well with all payments made in a timely manner, do retain this card. An old account carries significant weightage and may just boost your score.
New credit card account – If you have absolutely no credit history as of now, getting a new credit card is a good place to begin. Of course, for this to work well, you need to make complete payments and manage your credit utilisation ratio well. But remember, this is a good idea only if you apply for one card and handle it responsibly.
Delayed payments – If you delay or skip a payment even that one time, it may just have an impact on your credit score. Make sure you make timely payments. If you need help to keep track of repayment dates, how about setting up a reminder or signing up for an ECS option from your bank?
High credit utilisation – Remember that we mentioned a lower credit utilisation ratio is what will work in your favour? If you consistently use up or max out your credit limit, a lender is likely to view you as a person who needs to rely on debt to manage their financial health.
Account defaults – Remember that your credit report needs to be squeaky clean for it to not reflect negatively. So, any negative information such as foreclosures and settled accounts be it for credit cards or loans can severely impact your credit score. It’s best to handle credit wisely!
Applying for too much credit – Every time you apply for a loan or credit card, your credit report takes a hit owing to a ‘hard enquiry’. Too many such enquires can be a red flag to a lender wherein it could indicate financial struggles and may prompt a lender to deny you fresh credit.
Incorrect information – If your credit report mentions for instance an account that is not yours, or any other information that is inaccurate, your job is to report it immediately to the concerned credit bureau. Any such incorrect details can pull down your credit score to a large extent.
There are several factors that go into the credit report, and to ensure you do not wind up with a low CIBIL score, it is best to focus on improving on all of these parameters. Remember that while you are likely to get a personal loan even with a slightly lower credit score, your overall financial health still takes a hit when your score is low.
Hence, while it may take time to improve the score, do consider putting in the effort to ensure a smoother financial life ahead.