Sangeeta and Ritu are colleagues who are planning to make big purchases. They both apply for personal loans against their salary accounts but only one of them gets an approved loan response. Why does that happen? Every time you approach a bank for a loan or credit card, they first pull out your credit score. Any score above 750 is an excellent score. This 3-digit number being in the green is a sign of good credit decisions and strong repayment planning. It basically means that you have all it takes to gain your creditor’s confidence for a new line of credit.
When Sangeeta’s loan was rejected, she discussed it with Ritu to find out that they both had the same score! So why the difference in loan approvals? Despite having the same score, Ritu’s credit report included good credit as opposed to Sangeeta’s report which had some old entries of bad credit.
The factors responsible for determining the credit score are:
– Payment history:
– Length of credit history:
– Amounts owed:
– Credit mix:
– New credit picked:
To get a loan, it is important to focus on all the 5 factors. If lenders find even the slightest sense of doubt, the chances of loan rejection are higher.
All about building a good credit score
A bad credit score is not the end of the road. Improving your credit score is a time taking process but it is not impossible. You can start by analysing the risk factors available on your credit report and make changes accordingly. This report is basically a track record of all your previous loan EMIs and credit card dues. Your payment history and credit utilisation ratio, together, can be responsible for more than half of the factors determining your credit score.
To ensure a good credit score, keep the following actions in mind:
– Prioritise your monthly expenses and make sure you pay them on time. Your basic utilities, loan EMIs and credit card dues are commitments for every month. So make sure you clear them first and then decide on what to do with the remaining balance. Once a series of missed payments are reported to the credit scoring bureau, it affects your score for up to a few years. Avoid paying just the minimum amount due on your credit card until it is the only option left.
– Keep an eye on your credit utilisation ratio to stay away from appearing as a credit hungry borrower. Your credit limit is determined by adding up all your open loans and your credit card limits. Always try to maintain a credit utilisation ratio of 30-40%. Once you pay off your debts and clear your credit card dues, keep a low balance on them to maintain your overall healthy credit utilisation ratio.
– Apply for a loan or credit card when absolutely necessary. Whenever you pick a loan, make sure it contributes well towards your credit mix and do so only when it is needed. Every time you apply for a loan, it gets added as a hard inquiry to your credit history which could cause a drop in your credit score. So, avoid making too many hard inquiries.
– Don’t close your unused credit cards because it reduces your credit limit and increases the credit utilisation ratio. Many believe that it is a smart move to keep unused credit cards.
– If you find any inaccuracies in your credit report, get them rectified at the earliest. You can dispute the errors and get them rectified because incorrect information can also result in a low credit score.
Myths about credit score: BUSTED!
– Pulling your personal credit score does not count as a hard inquiry. RBI-approved credit bureaus like CRIF offer one free credit score check and in addition to that, you can pull it as many times as you want upon subscription on the yearly plan.
– Marriage doesn’t change anything about your credit score. It is often believed that the two scores merge but that is not true. Your credit history remains independent.
– Joint accounts usually are a great tool to help people with no or low credit scores. It helps them too kind of piggy-back on the joint account holder’s credit score in order to get loan approvals and begin their own credit history.
As easy as it is to build a good credit score, it is important to keep a close eye on it even afterwards to ensure that you are taking the right measures to maintain it. Start now by checking your personal credit score with CRIF.