21-Apr-2018 written by : FSI-Team
Your credit score affects a number of aspects of your financial life. It is necessary to be clear about what this number is, how it is calculated and what you can do to raise your score. Here are answers to 5 common credit questions that everyone has!
Credit score is a 3 figure number that is measured based on the information in the credit report. Each of the three credit reporting agencies (Experian, Equifax, TransUnion) have their own proprietary algorithms that give different weightage to different aspects of your report. However the basic factors that determine the score remain the same. Understanding these constituents will enable you to take wise credit decisions that will work positively for your score. Payment history has the maximum influence on your score. If you honour your debt obligations diligently on time, it shows that you are serious about repaying your debts. Late payments are either a sign of financial trouble or unreliable nature of the borrower. Credit utilization ratio, that is the amount of credit card debt in relation to the total available credit limit is another significant factor. Apart from these, the number of years of experience in handling debt, type of debt you owe and number of new credit applications are other influencing factors.
This is the most common myth that revolves around CIBIL scores. All you need to build your credit history is a single credit card. You need to use that card every month in order to show some credit activity. You can even set up 1-2 recurring payments to ensure that the card is active. You can pay off the entire statement balance when the bill arrives and still build your score. It essentially means that you do not pay any interest while using your card. It is not at all necessary to carry your balance to the next month. As long as you make your payments on time, you will be working towards building a good score.
Surely you can. Credit score is just a snapshot of your financial situation at a particular point in time. Positive credit habits can overshadow the past negative remarks on your credit report. Order your free CIBIL report and find out which accounts are bringing your score down. You will need to work on each of the factors that go in the making of credit score. Start making payments on time, pay off your credit card debts, and do not apply for new credit for some time. Demonstrating responsible credit behaviour will help in improving your credit situation. But it will take some time before you can see the results of your efforts. If you are in need of credit, and finding it hard to get approved for loans, you can look for loans for low CIBIL score. There are many private lenders who are willing to lend to people with a low score, but at a high rate of interest.
No, checking your own credit report and score will not damage your credit in any way. There are two types of inquiries that hit your report. Hard enquiries are the ones that are made by the lenders to evaluate your loan applications. These may bring a small drop in your score. Checking your own report and score is considered a soft inquiry. You may check it as many times as you want without the fear of it affecting your profile in any way. In fact reviewing reports regularly is a good practice. It familiarizes you with your own financial situation and encourages you to work to improve your score. It also helps to uncover cases of fraud, identity theft or mistakes that a credit bureau may have made while recording the information. You can access your free CIBIL report once every year.
When you are planning to take up a big loan, it is often considered a smart financial move to compare the rates from different banks so that you save on interest costs. But many people are afraid to apply to different banks, thinking that multiple applications will result in several hard inquiries and bring their score down. Yes, it is true that when you apply for several lines of credit within a short span of time, it is seen as a credit hungry behaviour. Multiple hard enquiries can bring a drop in your credit score. But the credit bureaus do allow for rate shopping. If similar applications are clubbed within a span of 30 days, then all applications will result only in a single hard enquiry, which will not impact your score in a big way. So don’t hesitate to shop for the best interest rates to protect your credit score. After all the biggest benefit of having a good credit score is to get the lowest interest rates on loans. Credit bureaus will not penalise you just because you want to get the best deal.