02-Sep-2017 written by : FSI-Team
The importance of credit rating in current times cannot be emphasized enough. Though there are still many people who may not be aware about the importance of the credit scoring, the awareness about it is fast growing. Awareness about the significance of credit rating is not sufficient and it is essential that there is awareness about what goes into making a credit score good or bad.
While it may be general knowledge that paying your dues on time is important for maintaining a healthy credit rating there might be a few aspects that a lot of people may not be aware of. Here are a few mistakes that can derail the credit rating:
Overusing Your Credit Card: All credit cards come with a credit limit which is fixed by credit card issuing company. This is amount which can be utilized by the user each cycle without paying the due amount or attracting any charges. Most users may assume that if they are able to pay the dues on time then how much of the limit they use is irrelevant. However this is not true and is a common misnomer. Credit utilization is the ratio of card usage each cycle/ total sanctioned limit per card. A usage above 30%-35% of the sanctioned limit even if the user pays the due amount is considered detrimental for the credit rating. A high credit utilization ratio is indicative of credit hungry behavior and also indicates risky behavior on the user’s end.
Closing Old Accounts: This is something that someone does not expect to impact their CIBIL score. One would assume that if they were to repay an old and running loan or surrender a card then it would have a positive impact on their score as their debt burden is reduced. However this is not the case. Age of credit impact credit score as an old well serviced debt or a card that has been in use for sometime is a good thing for the credit rating. Thus older accounts are better for the score as the lender has more records and a deeper history to evaluate credit behavior of the individual. So leave the old debt if you want a good healthy CIBIL score.
Guaranteeing a Loan: There may be times when a borrower may not fulfill the eligibility criteria in terms of the required income level or credit score or some other similar aspect. In such a scenario a guarantor may be asked to step in; the guarantor acts as a cushion in case the borrower defaults and will be asked to repay the dues in case of the borrower failing to do so.
What needs to be remembered here is that the guaranteed loan gets linked to credit report of the guarantor and reduces his/her borrowing power too! Any default on such a loan will put the borrower as well as the guarantor on loan defaulter list. Before guaranteeing a loan it is important to fully understand the implications of doing so.
Making Credit Enquiries: Whenever anyone applies for a loan the prospective lender will seek the prospective borrower’s CIR. This is termed as a hard enquiry and is reported in the credit report. Any hard enquiry unlike a soft enquiry (which is an individual seeking his/her credit report) lowers the score. Thus it is very important that when applies for a loan only when it is absolutely mandatory and they are sure about getting the loan sanctioned as they meet the eligibility criteria. This will ensure that any unnecessary enquiries due to loan rejection (prompting the applicant to apply elsewhere) are avoided. Often people are unaware that the simple act of applying for a loan can also cause the score to go down.