31-Aug-2016 written by : FSI-Team
Have you recently applied for a loan, or are in the process of applying for one? Be it for your dream house or car, or even a personal loan to tide you through an unfortunate financial crisis, you should know that while lenders are willing to extend a loan, it does depend on certain terms and conditions.
For instance, a lender will take into consideration your financial stability, expenses in proportion to the income, the number of dependents you have etc. before taking a lending decision at the time of loan underwriting. While we can't stress on these parameters enough, know that your cibil score also plays a very critical role.
The credit score is derived from your credit report, which is a go-to document for any bank or financial institution today, when you apply for a loan. A quick glance at the score tells the lender just how creditworthy you are, and the likelihood of the loan going 'bad'. In other words, the possibility of the borrowing not paying up towards loan repayment. It is generally accepted that a higher score yields loans at the most competitive interest rates and other conditions, and while each lender may set their own benchmark for what constitutes a good or high score, it is safe to assume that a score of 750 and above (out of a possible 900) is what will work in your favour. To increase credit score however you need to be diligent and watchful in your credit habits.
Credit scores and reports are generated by credit bureaus, and may differ slightly as they range from 300 to 900. However, while your score may not be constant across all bureaus, what works along similar lines is the algorithm that lenders use when quantifying credit scores.
What then should you keep in mind when taking a look at your credit score? Remember that there are several parameters that go into defining your score, and only once you are aware of these can you improve credit score.
1. Payment history – This parameter likely has the greatest weightage of all those that count when building a score, and hence it becomes very important to keep this in check if you want to increase credit score. Always ensure timely bill payment (ideally in full) and that there are no skipped or delayed payments on your repayment track record. If you think you need a reminder to make payments, set up reminders and alerts on your smartphone, or sign up for auto payment options such as ECS and direct debit mandates.
2. Amounts owed – Lenders also look at the amounts that you have outstanding on loan and credit card accounts. Take a look at the total available credit you have, and how much you have utilised. In this case, less is always more but what a repayment record does establish is your willingness and ability to repay loans you have taken, something a lender checks thoroughly prior to extending fresh credit.
3. Length of credit history – When you have been using credit responsibly over a relatively longer length of time, a lender is likely to look at this record favourably, because it shows how well the borrower can handle credit. Do not fret however if you do not have a lengthy payment history with a loan or credit card account, a lender is happy to acknowledge a shorter one as well, if it is unblemished. All this goes a long way to improve credit score.
4. Type of credit used – Lenders look at the number and types of accounts you have, i.e. whether secured loans (such as home or auto loans) or unsecured loans (such as credit cards or personal loans). A healthy mix of such accounts indicates to a lender that you are reliable as a borrower when it comes to debt and can comfortably handle all types of credit. This will also help boost your loan application.
5. New credit – A general rule of thumb is that if a borrower has recently opened a number of new accounts, it is likely that the person is struggling to make ends meet and hence may not be the safest bet to handle new credit. Not only is this detrimental to improve credit score, but it also reduces the chances of your loan application being approved.
Your credit score can be the deciding factor in whether your loan application gets rejected or approved. It also helps determine the terms and conditions of your loan and hence it is important that you know how to increase credit score by maintaining healthy credit habits. With the importance of a credit score in every individual's financial life it is never too early to bring in some discipline and focus to better the score for the long term. Give wings, then, to your loan application through a good credit score!