03-Aug-2016 written by : FSI-Team
When you’re looking for fresh credit and approach a bank or financial institution for the same, nothing scares a lender off more than a few red flags in an individual's credit report. Given then that the credit report can be the make or break reason for your loan application to either go through or be rejected entirely, let's take a quick look at some of the terms you need to ensure are not on your credit report at any point.
Overdue, which indicates that a loan outstanding has not been cleared on time.
30 / 60 / 90 / 180+ DPD, which indicates the number of days past due date (or DPD) that an account, is overdue.
Substandard account, wherein payments are being made 90 days past the due date.
Doubtful, wherein an account has remained substandard for a period of 12 months.
Loss, an account wherein the lender has identified a definite loss and collection is not possible for various reasons, including insolvency on the borrower’s part, or the sheer unwillingness to pay.
Written-off, wherein a payment has not been made for over 180 days since the payment due date.
Settled, wherein the complete loan amount is not paid, but a part amount in consultation with the lender is ‘settled’ and the account is closed thereafter. Remember that with this particular option, while the loan may be closed on the lender’s books, your credit score does get impacted negatively, because a loan settlement still indicates issues such as insolvency or the borrower’s inability to pay for whatever reason.
Payments not made in time – Ensure that you make timely payment, on or before the due date towards all outstanding credit card or loan account dues. If you believe that keeping track of various loan and credit card payment due dates is difficult, consider setting up auto-payment options such as ECS mandates or direct debit options from your bank.
Minimum payments – Paying off just the minimum amount due on a card indicates financial stress, wherein a borrower is in all likelihood unable to repay the amount outstanding. While this is good for the lender (owing to the high rate of interest they charge when a borrower or card holder rolls over payment), it does not spell good news for the consumer at all. Not only does your cost of purchase increase drastically, it also reflects badly on your credit score.
Too many fresh lines of credit – It is likely that an individual who is unable to make ends meet without availing of credit may open too many credit lines in one go, which hints at a possible debt trap and insolvency to a lender. Hence, opt for a new credit card or a loan when you really do require one, and not merely on account of any new offers or deals that a cardholder or loan provider may dangle as a carrot.
Being a guarantor – While standing as guarantor may be a feel-good factor, know that the loan will reflect on your credit report, and in case the borrower defaults on the loan your credit score will take a nosedive as well. This is because whether you are the primary borrower or the guarantor, the loan taken is in your name as well, and this will be a part of your credit history. Hence, it is prudent to take an informed decision before agreeing to become a guarantor on anyone’s loan.
Remember though that while the credit report (and score thereof) is a critical factor, lenders use cohesive information which includes your income, repayment capacity and other existing financial commitments to name a few, prior to making a lending decision. That said, it is always a good practice to have a clean or good credit score in order to get credit when you require it the most, and at the most competitive rates.