Thursday, 8 September 2016

4 key facts about credit score

CIBIL is a credit information company that collects and maintains the records of an individual’s payments for loans and credit cards. Banks and other lenders submit this information to CIBIL on a regular basis. Based on the credit behaviour of an individual CIBIL assigns a score to them. A credit score helps to objectively evaluate the creditworthiness of an individual. Lower the score higher is the risk associated in lending to the person. This credit score is now being used widely by all banks, financial institutions as well as private lenders to evaluate and approve loan applications. Here are some key facts about the credit score that will give you a clear picture of how it affects your financial journey and what you should do to ensure a high score.
If affects various aspects of your financial life
Your credit score is the main factor that determines your eligibility for a loan. Lenders check your score to evaluate your reliability. If you have a good score you can get approval for loans without any hassles. It also gives you the power to negotiate for better terms and conditions and a lower interest rate. These days credit scores are accessed not just by financial institutions. Telecom companies, insurance companies and many broking firms can access the credit information of an individual. A bad credit score may mean higher insurance premiums. Many landlords check the credit score of an individual before renting out a property. Employers too check the credit score to ascertain the reliability and financial health of a prospective employee.

There are a number of factors that affect a credit score
There are several factors that go into the constitution of a credit score.
·         Payment History- You need to pay your bills and loan instalments within the stipulated dates in order to maintain a healthy score. A single late or missed payment can have a negative impact on the score.
·         Total debts you owe to the lenders- If you are utilizing too much of the credit limit that is sanctioned to you then it will negatively impact the score.
·         Length of the credit history - If you have been repaying your debts diligently over a long period of time, it gives sufficient proof that you are a responsible borrower and hence it raises your credit score.
·         No. of hard enquiries- If you have applied for a loan recently the lender will run a check on your score to judge your financial health. A number of such enquiries can have a negative bearing on the score.
·         Credit mix- Having a healthy mix of credit including secured and unsecured loans like mortgage, car loan, credit card etc. affects the credit score positively. In contrast a single type of credit like a credit card is likely to harm your score.

If you do not take credit you will not have a credit score
Many Indians still believe that living on credit is a bad thing. As long as you pay for your expenses in cash you are financially sound. But the fact is if you avoid credit cards and loans you will not have any credit history. There will be no information regarding your credit behaviour and hence no score will be assigned to you by the bureaus. In the absence of any proof regarding your credit worthiness lenders will find it difficult to assess your repayment capabilities. You will be considered as risky as those with a low credit score and so you can have a hard time in getting loan approvals. If you have not taken any credit till now then start doing so and make timely repayments to build a positive credit history.

A low credit score does not mean you cannot get any loans in future
Different banks have different lending criteria. While some banks may reject your loan application because they have strict credit score requirements others are flexible with it. There are many lenders who extend credit to people with lower scores. They charge high interest rates to cover for the greater risk that they are exposed to.
Moreover, if you have a low credit score it does not mean that it will stay that way always. Through strict financial discipline you can improve your credit score and hope for better terms and interest rates. Order your credit report, analyse it for errors, and dispute them to get them corrected immediately. Start making payments on time and work on the factors that are bringing your score down. These efforts will help in raising your score in the long run.

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