Biggest Myth: My Credit Score Does Not Make Any Sense

02-May-2018 written by : FSI-Team

My Credit Score Does Not Make Any Sense

Did you recently apply for a loan and the file got rejected because of low credit score? Don't worry you are not alone. On a daily basis, there are a lot of loans and financial products getting rejected because of this very reason. Have you ever thought of pulling the credit report and see what went wrong in it?

Even if you opt for a credit report, there are a lot factors mentioned in it which will make no sense to you. You will fail to understand the rating patterns and how each transaction affected your score. First of all, you need to understand what contributes to your cibil score,

There are five key factors which determine the credit score,

Payment history

Your payment history on your existing loans and lines of credits accounts 35% of your score. If there are default payments towards your account, it will not only affect your cibil score but also will stay in your report for at least 7 to 10 years. If you never miss your payments and pay all your EMIs on time, you cibil score will be healthier.

Age of the credit accounts

Due to overspending your card limits, if you one day think of closing all your cards, think twice. Age of the accounts matter in your report and contributes 15% of your score. The score can stay intact or even increase if you have an old account running.

Limit usage

Credit utilization is an important aspect not only in your life but also in your cibil report. Credit limit utilization accounts for 30% of your cibil score. If you have a credit card with maximum credit utilization, try paying it off as soon as possible. The key is to stick to 10% of the credit limit and spend on utilities rather than luxury wants.

Mix of accounts

You can opt for multiple loans according to your loan eligibility like car loan, personal loan, education loan, etc. at once. This factor accounts for 10% of your credit report. The report likes to see how well you can manage the money with having multiple credit accounts.

Credit inquiries

There are two types of credit inquiries, hard and soft. If a creditor asks for your credit report to consider if you are credit worthy, it is consider as a hard inquiry. Multiple hard inquiries can damage your cibil score to a very great extent. Inquires contribute 10% to your cibil score.

Now let's clear some common myths on credit ratings,

My financial status is reflected on my report

This is one of the most common myths surrounding people in regards to a credit score. A cibil score is not calculated on the basis of your age, your locality, your gender, your race, your incomes and gains, which car you drive, etc. A score is simple reflection of how you manage your credits and helps lenders determine if you are credit worthy.

I missed out on a single payment, but I paid it of later. This will not affect my credit score.

This is not the case. Even if you miss on a single payment, the transaction gets reflected towards your account and your credit score takes a huge dip as payment history contributes 30% of your credit score.

I don't have to worry about my report as my spouse has a good cibil score.

You cannot rely on your spouse's good credit score and keep yours for hanging. You have a different credit identity than your spouse and you cannot use your spouse's credit as shield for credit transactions. If you plan to take a mortgage together in the near future, make sure you have a good credit report as well.

I can never get a loan, I have bad cibil score

This is absolutely not true, even with low credit score you can apply for a loan. You will be paying more interest compared to market standards and also you won't have power to negotiate on processing fees and interest rates.

If you fail to understand the terms mentioned on the report, seek help but do not just blindly go with the flow. This practice can help you get good financial benefits in the future.



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