20-Mar-2019 written by : FSI-Team
Credit report, credit score, Loans, credit cards and now very common words we all have been listening in a day to day life. There was a time when these all were the things that were not this common and not everyone knew about! With the accessibility of credits, one must know the basic of it. Credits may look a cake walk when applied for but it comes with a lot of responsibility. Repayment also looks easy initially, but other financial responsibilities one has to take, it is tough to stay regular in repayments, but not impossible!
Let’s know the basics! Credit score and Credit report are the two terms people have to check through when it comes to credit. Credit Report comprises of 3 things. Credit Score, personal information of individual like PAN card details, address, email id, contact number etc and detailed report of credits taken and it’s repayment. Credits here comprises of loans and credit cards both. What does a credit score comprise of? There are 5 factors what makes a score, viz. Payment History, Amount Owed, Credit Mix, Length of Credit History and New Credit. Let us understand all these in detail.
How constant the borrower has been in repaying the credits taken, in terms of loans or credit card makes the most of the credit score. There is a term called creditworthiness which means how responsible the borrower is in re-paying the amount borrowed shows the creditworthiness of an individual and that is always measured by Payment History. It carries 35% of the total weightage of the entire credit score.
Surprisingly, the total amount owed by any individual has 30% of weightage in credit score. And that is a second major constraint. The total amount that is taken as credit from start is considered here.
One has to understand the different types of credits available. There are four types of credits. Secured and Unsecured type of credit. Fixed and Revolving type of credits. Secured are the once which has some guarantee in terms of asset kept under the amount borrowed. Home loan, car loan are a few of the examples. Unsecured type of credit is the one where there is no guarantee kept against the amount borrowed. Personal loan, Education loan, Credit cards are few of the examples of unsecured loan. Fixed type of credit means a credit which has a fixed amount and will be repaid by a particular time frame. Loans are usually fixed types of credit. Revolving credits are the one where the credit line is revived after the payments are done. Credit cards are one of the examples of the revolving line of credit.
A good mix of these type of credits will make a good credit History!
The longest credit account is also one of the factors that add up to score. One should never close the oldest credit account as that also plays an important role in the score. Longer the account better is the score.
Though not a history constitutes, new credit has 10% weightage in a score. That does not mean one should keep on opening new credit accounts every now and then as that will be considered as credit hungry behavior and will get the scores down. But a new credit account each year will help in adding up to the score.
How can one determine the score? One must check the score if not more but atleast twice a year. Anyway, the RBI has passed a mandate to provide one free credit report each year to all the credit bureaus. So, check the score to know that you are on the right track!
This way one can know the constituents of their credit history and can work on them for a better score as and when required.