05-Aug-2016 written by : FSI-Team
"Subbu" Iyer was sure it was time to take his passion for Carnatic music to the next level. Westernization was encroaching from all directions and he knew this branch of traditional music was fading fast. He had to save the dying art by establishing a "Music School for Classical Learnings". It was his true calling. On advice of his banker friend, he decided to take a look into his credit report before he applied for a loan. But he did not understand the nuances of finance that well. He wasn’t sure on what impacts his score and what does not. Iyer was lucky his banker friend was there to guide him.
What Iyer's banker friend suggested was absolutely right. Experts advise you should take a closer look at your credit report before you apply for any loan or credit card. Credit score is one of the maiden checks that a bank does. Your score is a reflection of your past credit pursuits as captured in your report. All the keys on how to improve your score actually lies within the scope of your report. It is therefore very vital to be able to comprehend every detail of your credit or cibil report and understand all that impacts your score.
"Days Past Due Schedule" – Being careless in making your debt repayments on time can adversely affect your credit score. It smudges your image as a responsible user of credit. But don’t get worried over one or two missed payments. Lenders check the "Days past due schedule", which shows data for past three years; to see how frequently you have missed payments. Incase they find that you have recurrently delayed payments then, they will begin doubting your willingness to repay your debts. This not only dims your chances of clearing the evaluation process but also poorly impacts your score.
Every missed payment forces your score downwards, however consistent timely repayments thereafter can help wear-off the effect quickly.
Account Information – Everything given under this section is important to a lender. Lenders calculate your utilization ratio by using the information given under the “Account Information” heading. Your outstanding balances and total credit limits are all given in this section. If you carry high balances on your cards or you frequently top-up your loans with additional debts, you are bound to have a high utilization ratio. This does not go down well with lenders.
By carrying high balances you are potentially sitting over a ticking time bomb. You could come under immense debt burden in future because of which you may not be able to keep up with all your debt repayments. Thus, a high utilization ratio will thrust your score downwards. On the other hand, a lower utilization ratio will mean a higher score.
Secured Loans versus Unsecured Loans – Your score gets better if your debt portfolio has a higher fraction of secured loans such as home loan, gold loan, car loan etc vis-à-vis unsecured loans such as personal loan, education loan, credit cards etc. This is because there is a higher degree of safety in secured loans than unsecured loans.
With a higher percentage of unsecured loans in your portfolio, you pose high risk to lenders as there is no surety of getting their money back except for maybe, your personal guarantee. Therefore, prospective lenders view secured loans in a lighter tone than unsecured loans.
Enquiry Information – Incessantly applying for credit can negatively impact your credit score. Each time you send an application for a credit facility, you allow the lender to withdraw your credit report. This enquiry is recorded alongwith date, enquiry purpose and amount under the "Enquiry Information” Section. This type of enquiry is termed as a "hard enquiry". Too many and too frequent enquiries will make you seem as someone who is entirely dependent upon credit and makes you a very risky proposal. To reflect the quantum of high risk in your profile, your score takes a beating.
Must note, your personal enquiries are considered "soft enquiries" are have no impact whatsoever on your score.
Inaccurate Information – You may have been a conscientious user of credit but have no misconceptions that your report will be absolutely clean. There is a grave chance that there could be an error, misreported entries or inaccurate information about you. If such an error is under the “Accounts Information” section, it can hurt your score. If it is under the “Enquiries” section, it may be hurting your score or could be indicative of identity theft.
Raise an alarm and report to the bureau immediately. Sometimes, a clean & accurate report leads the score to ascend a few points.
Personal Information – Though it is important to have a truthful report, but your name, address, contact information etc has no bearing on your score. It is primarily available to establish your identity.
Employment Information – Records of your current or previous employer, your salary etc has no impact on your score.
Account under Dispute – If you have raised a dispute with the bureau about an item on your report, it will have no impact on your score unless the dispute is resolved. That is if it is resolved in your favour then it may impact your score but if it is not resolved in your favour, you may find your score hasn’t changed at all.
Do note - Although information on your credit report may live on it for at least three years and as long as seven years. But, your score is affected by data for past two years only.
Subbu Iyer soon got the hang of how to handle his score and was eligible for HDFC Personal Loan. He couldn’t be more ecstatic on the day his school was inaugurated. He finally realised his dream. However, if you ever feel stuck with managing your debt, we are just a call away.