These days organizations like Banks, FI’s, credit card companies, insurance companies, online lenders and even the mobile companies track a credit score to know the risk taking potential of the consumer and to mitigate the bad debts. Credit score determines the loan amount, credit limit, interest rate as well as its an assurance to qualify for the loan process and the credit worthiness of the borrower.
Reserve Bank of India has licensed Credit Information Companies like CIBIL, Equifax, Experian and Crif Highmark to function as Credit Information Bureau. These companies generate a Credit Information reports as well as Credit Score for an individual based on their Credit Rating or Credit History. The score ranges between 300 to 900, where anything above 750 is considered to be a good score and an individual without any credit history is scored as -1. Similarly if the credit score is for less than 6 months it is calculated as 0 and it takes almost 2 to 3 yrs or may be more to stand with a satisfactory score.
Credit score is the first criteria to determine the eligibility for any kind of loan. The credit history is summarized by the Credit Bureau as required by the banks or FI’s on monthly basis. Bad credit history or the low credit score leads to the rejection of the loan application. It is important to understand the factors and the effective measures to be taken to avoid the negative effects.
There are many factors that impact the Credit Score and have to be taken care of in order to maintain the good credit score.
Multiple Loans & Credit Cards
Multiple secured & unsecured loans as well as multiple credit cards bring down the credit score as it indicates the high debts. Fixed monthly obligation to Income ration ratio (FOIR) is calculated by the banks or FI’s before any approvals or the further processing of any loan. If the history shows the overburdened you, the organizations will not be willing to fund you further. An individual will be considered as incapable to bearing the burden of monthly EMI’s. Owing or closing the old cards adversely affects the score as it reduces the overall credit of an individual. Unless the spending is reduced Credit score is also calculated with the utilization rate. Both multiple cards, loans, closed and active affects the credit history and the score.
Non Payments of EMI/Dues
Activities like non payments or delayed payments indicate the seriousness about the repayments or the incapability to repay the debts. It’s important to monitor the single or joint accounts to ensure that no EMI’s are missed.
Increased Credit Limits
Utilizing the credit and keeping the balance low is to be monitored minutely. Requesting for an increased credit limit negatively affects the credit score as it indicates the dependency on the credit card.
Balanced combination of revolving accounts like credit cards and non revolving accounts like a mortgage or a home loan take the credit score on a higher side. Any individual who carry lots of credit cards but not a single loan account can negatively affect the CIBIL score. Different credit handling indicates the diversity.
Unutilized Credit Cards
No transaction on credit cards turns it to be an inactive file and can bring down the credit score to a lower level. At times even when an individual possess the credit card doesn’t want to use it so as to avoid the bad habit of shopping or spending on credit.
Becoming a loan guarantor to a friend or a relative can be a risk in credit report. Non repayment of the loan amount makes the applicant a defaulter in a loan and it becomes the obligation for the guarantor which in turn reduces the CIBIL Score of the guarantor.
Banks rejects the loan request of an individual who were unable to pay their debts in past due to any reasons. This is reflected badly in their Credit Score and getting a loan after this will be extremely difficult.
Monitoring the Credit Report regularly & Maintaining the score for Good
It is advised to observe the credit report every 6 months to keep you updated about any faulty information due to wrong information or delayed reporting to CIBIL. It can even be done online.
Apart from the factors mentioned above, maintaining good credit history can be done by tracking the credit report on a regular intervals, on time bill payments, avoid multiple loans, credit cards or new accounts and by maintaining the healthy fusion of secured and unsecured loans.
With a bad credit line, life becomes extremely difficult from getting a house to live or a god job, higher insurance premiums, buying a new car and may be an amount for new startup – even if it seems to be a great idea and data to prove it.