X thought he had made it! He was from an extremely poor family and studied hard, and he received a scholarship to join a college, which he otherwise could not afford and ultimately got a job in a multinational firm. Now for him, life was moving smoothly with family, and he planned to purchase a new house. For this, he approached the nearest lender where he had his savings account and asked for a home loan. A few calls later, he came back home disappointed because he was turned down the home loan offer due to no credit score.
What is a credit score?
A credit score is a number that displays how much risk a bank or NBFC can take up while lending you. To put this simply, the higher your credit score, the more your chances of availing of a loan. It does not just decide whether you can get the approval for the loan but also determines how much you can avail yourself of as a loan and the interest rate that you will be charged. Now, this is a massive deal!
Thus, it is important to understand what exactly makes up a credit score. Your score is partly based on your past credit record, which shows how much you have borrowed previously and today and how nicely or badly you have managed your debts. Read on to know this in detail –
What are the parameters considered to decide the credit score range?
Payment history – Remember, your parents always paid their bills on time and encouraged you to do the same. This habit is true even today. Your credit card dues can haunt you forever. Quick gratification has long-term repercussions. It is just like you say for your weight loss journey – one moment on your lips, and you will have it forever on your hips. Negative items usually stay on your credit report for seven years. However, bankruptcies and other public records can remain on for a longer time. Wait for a second; what if you have never ever borrowed? How are you looking to show your payment history?
No loans? You will have no credit history.
No credit history? Means you have never availed a loan.
However, relax; it does not mean you cannot purchase your dream home. It means your options are limited. And it will pave the way for your future loans.
Your debt level – By now, you might think you have understood by now borrowing more means a better credit history. There is both good and bad credit. However, generally borrowing more may infer a good credit score provided you repay the EMIs and dues regularly.
Credit history lender – the smoother and longer the credit history, the better is your credit score. It takes a lot of years to form a strong credit score and, at times, over ten years to form a good score.
Inquiries – Inquiries for credit rating might impact your score. There are 2 kinds of enquiries on credit scores, one that is made through financial institutions with your permission. And the other is done by keeping a tab on your background. The former affects your score negatively, and the latter might not.
Credit mix – Credit mix shows the lender your potential to manage different loan types. It is not the most necessary factor in deciding your loan terms. But it is even helpful as this assists lenders in understanding your borrowing experience.
However, that does not mean that a user can apply for all types of loans because the number of hard inquiries will affect your score. Also, there is a chance you might not be able to manage all your responsibilities.
Good score and credit history
So, now we have full knowledge about what a credit score is and why it is crucial to maintain the score. Read on; here’s a refresher –
∙ Repay your bills timely – Try placing reminders in your bank account or calendar. You may even allow automatic credit card debt payments. Delayed payment by around 1 to 2 days can have a bad impact on your credit score. In case you have missed your payment, ensure to pay them as soon as possible. The more you delay your payment, the worse it may be for you. Here are ways you can manage this –
✔ Keep your balances on credit cards low – Higher your outstanding debt, the more is the impact on your score.
✔ Timely manage your debt – In case you have an extremely short credit background, do not open various accounts now. Rapid account opening appears risky and even lowers the age of your account. Taking into account the debt, you can manage it on your own. In case loan repayments are making your financial life tough, get in touch with a consultant.
✔ Avoid closing your old credits cards – Closing your old credits cards is nothing but a short-term strategy that many can use to ameliorate their score. However, it is not the correct strategy because it takes away a good length of credits history.
✔ Reduce your new credits applications – Apart from enhancing the number of enquiries, various multiple applications may raise the red flag in the minds of the lender. Ensure to be careful that you do not go overboard.
✔ Watch out for your credits report – Now, you can watch out for your account balances as well as your returns on your investments carefully. Check your report regularly. This is not just considered a good financial habit but also assists you in understanding the results of your past actions.
✔ Slowly lower your overall debt burden – If you are in debt of any type, take the relevant measures to eliminate it. Doing so assists you in ameliorating your score. Make sure to make a budget and stick with it and begin paying your rate of interest debts.
✔ Do not go over 30 percent of your credits card limit – Try not to surpass over 30 percent of your overall yearly income. And ensure not to spend over 10 percent of your monthly income on your credits card repayments.