Thursday, 22 February 2018

Do Rich People Have Better Credit Score?

Credit Bureaus have been around in India for more than a decade but despite that, the awareness about them is still not so high. As per a survey done by us at CreditSudhaar, about 53% of the polled sample was not aware about credit bureaus and credit scores, while only 15% knew their own score. Thus it is easy to estimate that there would be many myths that surround credit scores and what impacts and does not impact the score calculation. One such myth is related to one’s income levels and wealth and its impact (if any) on credit scores. Does being rich mean that you would have a better score?
Do Rich People Have Better Credit Score?
Before we discuss the above question it is important to know what impacts the credit score calculation. There are five factors that are factored in when credit score for an individual is being calculated:
Ø  Repayment History
Ø  Utilization Ratio
Ø  Credit Mix
Ø  Credit Length
Ø  Credit Inquiries
The five factors mentioned above in various proportions decide the credit score of an individual. So whether one is rich or poor has no bearing (as it is not amongst the list of factors that are factored in when calculating the score) upon them being on the loan defaulter list or not being there. What will impact your credit score, is how many credit enquiries you make or how long you have serviced a loan and not how much you have in your bank account.
Someone who is wealthier than another person may have a lower score than a person who has lesser wealth. This might be due to the fact that despite being richer, they might not be disciplined enough to pay their dues on time or because they depend too much on their credit card. On the other side somebody who might not have much of a bank balance but manages to pay their due on time, is disciplined enough not to make reckless card usage and credit enquiries will manage to have a higher credit rating.
Rich or poor makes no difference as long as the borrower is disciplined about paying their dues; they keep their old debt, are not reckless with their card usage and have a health mix of secured loans like housing and auto and unsecured ones like personal loans and rolling credit..
Is there a relationship between income and debt?
While as we discussed above there is no relationship between wealth and the credit rating but there is a relationship one’s income and debt. Whenever you apply for fresh debt the prospective lender will consider your income and also your current level of debt before they sanction the loan to you. For some loans their might be clear cut minimum eligibility criteria for the applicant to get a loan sanctioned while for other loans the lender may consider the income levels in light of many other factors for the loan to be sanctioned.
Lenders want to know whether the borrower can service the amount of loan they are seeking with the flow of income. So along with how much they earn is also important to know and also what is the current level of the debt they already have. If the existing level of debt is already high then even with a handsome income level the borrower might find it to service additional debt. Thus generally a debt to income of less than 40% is considered to be optimal if you are looking for any kind of additional debt. This means that not more than 40% of the borrower’s monthly income should go towards paying the EMIs.

When one applies for a credit card then also the card issuing company sanctions the credit limit based on the income levels of the applicant. Thus income does impact how much debt one can have and service; however being rich or poor has no bearing on the credit score.

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