11-May-2018 written by : FSI-Team
Have you ever applied for a personal loan or home loan? Do you know how your credit report looks like today? If your answer to these questions is "no", then it's really important that you learn about credit score and the kind of impact it can have on your life, but first things first:
Just like your academic aptitude is reflected by the grades you get on your report card, your financial strength or "creditworthiness" is ascertained on the basis of your credit score.
Here is how it works:
Your financial activities such as loan repayments, credit utilization (the amount of credit you use with your credit cards), current debt, etc. are monitored by the banks and the data is shared with the credit rating agencies like CIBIL, Experian, etc.
These credit rating agencies have their own methods for credit score calculation which usually takes into account the factors shared above. They may also have different scoring ranges. For instance, CIBIL scores the individuals no a scale of 300 to 900.
Credit scoring is very simple to understand. For instance, if you are never late with your EMI payment or credit card bills, then CIBIL will give you a good score. Similarly, if you delay the payments, use too much credit on your credit card, then you may need to improve CIBIL score to even get to a decent level.
A credit score is just a number- an important number, but still a number. However, the complete picture of your credit profile lies with the credit report. This is because it contains all kinds of details related to your financial activities including your personal details.
In your report, you can expect to find your contact details such as phone number, address, and financial details such as your income, types of loans you currently have, number of late payments along with details, remarks from lenders (if any), etc.
As you can see, It contains all the information that a potential lender may want to get their hands on before they decide what to do with your loan application.
It’s also of great significance for as well, as you can assess your creditworthiness before you send your loan application. If you think there is a margin for improvement, then you can take measures to improve CIBIL score.
It’s true that your credit report is your encyclopedia to a better credit score. This is because it tells you everything you need to know to succeed in that endeavor, such as:
As mentioned earlier, late payments can have an adverse effect on your credit score. So, if you find instances of multiple late payments on your credit report, you can take control and plan in a way that there is not a single late EMI or credit card bill payment in the future.
The types of credits you have experience with can greatly affect your score. Generally speaking, the more is the variety, the higher is the score.
So, if your report is only based on a credit card, then you won’t be able to get a high score easily. However, if you get a small personal loan and repay it on time, then you can make a huge improvement in a short period.
In a large number of cases, people get a low score because of discrepancies or mistakes in their reports. However, this problem can be easily solved by monitoring the report on a regular basis.
If you find a mistake in your report related to your personal or financial information, then you can immediately contact the bank for resolution and protect your score from damage.
When it comes to personal finance, then few documents come close to the significance of the credit report. It’s what that documents your income, finance management qualities, an instance of loan default (if there is), etc.