With each passing day, people are becoming more aware and curious about credit scores.
Hence they have lots of doubts about it, too, which are often unanswered.
So let us solve this for you by answering some common queries surrounding credit scores and reports.
What does “credit score” stand for?
A three-digit figure that summarises your credit history is what is known as your credit score. It reflects both your ability to repay debts and your creditworthiness. To put it another way, your credit score is an indication of how responsibly you have handled the payback of your debts in the past. This includes the payment of your credit card bills and loan EMIs. When determining a person’s credit score, various factors, including their credit history of repayment, credit mix, credit utilisation ratio, credit inquiries, and so on, are taken into consideration.
Why is the maintenance of a high credit score crucial?
No one wants to be on the cibil defaulters list, right? So, your credit score is one of the primary considerations that lenders will make when deciding whether or not to approve your applications for loans and credit cards. And you yourself also know if your credit health is fine or not.
Moreover, the application of credit scores nowadays is no longer restricted to the exclusive purpose of risk assessment by lenders. The applicant’s credit score is becoming an increasingly important factor in not just the interest rates that are assigned to loans but also in the hiring decisions that are made.
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Does a low credit score automatically rule out getting a loan?
Despite the fact that lenders reject you if you are on the cibil defaulters list and offer more advantageous terms and conditions as well as a wider selection of loans to borrowers with high credit scores, this does not necessarily mean that people with poor credit scores are completely shut out of the market. If a borrower has a low credit score, it is possible for the lender to approve them for a loan, but the interest rate on loan would be significantly greater than what would be offered to customers with a higher credit score.
Where can you obtain a copy of your credit report?
At the very least, once every year, to ensure that you are not on the cibil defaulters list, each of the four credit bureaus in our country gives the facility and chance to fetch credit report to check credit health. The requests for free credit reports that consumers make should be spaced out throughout the course of the year in such a way that they are able to obtain one free credit report for each of the four seasons. Consumers also have the option of visiting online financial markets, which will allow them to gain access to free credit reports as well as their monthly updates.
There are five major aspects that contribute to your credit score.
-Credit usage ratio
The percentage of your overall credit card limit that you have actually used is referred to as your credit utilisation ratio. A credit usage ratio that is greater than 30–40 percent is typically interpreted by lenders as an indication of a need for additional credit. When you pass this threshold, the credit bureaus may reduce your credit score by a few points as a result. If you find that you frequently go over this threshold, you should either ask the company that issued you your credit card to raise your credit limit or apply for a second credit card.
Also, remember, those who every month maintain high CUR stand a higher chance of falling into the cibil defaulters list.
-A blend of credits
The ratio of your unsecured debt to your secured debt is referred to as your credit mix. Credit bureaus award better scores to borrowers who have a higher proportion of secured debt, such as mortgages, vehicle loans, or loans secured against property. This is because lenders tend to give preference to customers who already have some kind of secured debt. Therefore, to raise your credit score, you should think about prepaying any unsecured loans you have, such as personal loans, loans against credit cards, and so on. Alternately, you might also keep a healthy credit mix by exchanging existing unsecured loans for secured ones, such as a gold loan, a top-up home loan (for people who already have home loans), a loan against stocks, or something similar.
-A record of previous payments
The summary of your ongoing loans, credit history, credit accounts, and current credit card balances can be seen in your credit report. When determining your credit score, each of them will be taken into consideration. Building a positive credit history and a solid credit score requires consistent on-time payment of financial obligations, such as bills and instalment payments on consumer loans (EMIs).
When you apply for a credit card or loan, the financial institution will check your credit history by requesting a copy of your credit report from one of the three major credit agencies. This helps them determine how trustworthy you are. These kinds of lender-initiated queries are regarded as “hard enquiries” by credit agencies; as a result, they are included in your credit report and cause your credit score to drop by a few points. Therefore, instead of making multiple credit enquiries, particularly within a short period of time, you should think about visiting online financial marketplaces. Credit report enquiries initiated by them are considered to be soft enquiries, which do not affect your credit score in any way, and they are therefore a better option.
-Be sure to keep an eye on loans that have cosigners or guarantees.
When you co-sign a loan or become a guarantor for someone else’s loan, you take on joint responsibility for the loan’s prompt repayment. Your credit score, along with that of the primary borrower, will be negatively impacted in the event that the primary borrower is late on payments or defaults on loan, and both will fall into the cibil defaulters list if a default is done. As a result, you need to make sure that you routinely monitor the activities associated with the repayment of any loans that you have co-signed or guaranteed.