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The first criterion that determines your eligibility for any kind of loan is your credit score. A credit score is a three digit numeric summary of your entire credit history which is prepared by CIBIL (Credit Information Bureau, India Limited) based on monthly information provided to CIBIL by banks and financial organizations. Normally, an individual’s credit score ranges between 300 to 900.
When you apply for any loan and submit the filled loan application to a bank, the first thing your bank will check is your credit score and credit history. If you have a bad credit history and your credit score is low, your bank will directly reject your loan application. But, if you have a good credit score, your bank will immediately pass your loan application for further formalities. Given that your CIBIL/credit score is the first and major deciding factor to help you get your loan application processed, it is very important to understand the factors that affect your credit score and take steps accordingly to improve it if it is below expectation.
Most of us think if we don’t pay our credit card bill on time, our credit score gets severely affected. But, it is not the only factor that affects your credit score. There are a number of factors that we need to pay attention to in order to maintain a good credit history and credit score.
Mentioned below are number of factors that may affect your credit score:
Having multiple secured and unsecured loans may affect your credit score. Likewise, having multiple credits cards may bring down your credit score. Because, they indicate the high debt you are already carrying. Usually, banks or financial organisations consider your debt to income (DTI) ratio before approving your loan application and if your debt to income ratio shows that you are already overburdened, they will not be willing to offer you further credit. They will consider you incapable of bearing the burden of your monthly EMIs. However, it’s not just owning multiple credit cards that adversely affect your credit score; closing your old credit cards may also affect your credit score. When you close a card, you reduce your overall available credit. Unless you reduce your spending, this will adversely affect your credit utilization rate, which is one of the most important factors used to calculate your credit score. Thus, if you have multiple loans, credits cards, both active and closed, and new accounts, this may affect your credit score.
Delayed payments and non-payments may negatively affect your credit history and bring down your credit score. Such activities indicate that either you are not serious about repaying your current debt or you are not capable of repaying them. As a result, your credit score will go down. Thus, your repayment history plays a major role in developing a good credit score. Therefore, make sure you pay all your debts on time. Also, monitor your single and joint accounts regularly to ensure that no payment is missed.
Requesting to increase your credit limit may also affect your credit score, indicating that you totally rely on credit cards and you are overburdened. It is advisable to avoid opting for a high limit on your credit card, unless you really need it. So, keep a check on your utilization of credit and try keeping your balances low. Opt for new credit only in moderation.
Having no loans and carrying many credit cards may affect your credit score. Many of us have many credit cards, but don’t have even a single loan account. This may negatively affect your CIBIL score. Having a balanced combination of both revolving credits like credit cards and non-revolving credits like a home loan may, helps you improve your credit score. It indicates your diversity in handling different types of credits.
Many of us are too suspicious about using credit cards. We think that credit card usage may lead to bad credit habits and unnecessary spending. So, we prefer not to use credit cards, even though we possess them. This kind of no transaction on credit cards will make your credit file inactive and may bring down your credit score.
Not checking your credit report may affect your credit score. Sometimes your credit report may contain faulty information due to wrong information or delayed reporting provided to CIBIL. This may bring down your credit score. So, it is always advisable to check yo0ur credit report/history for any errors at least at a gap of every 6 months. You can do so by purchasing your credit information reports online.
Even though, the above mentioned factors may affect your credit score and bring it down, you can still maintain a good credit history by monitoring your credit report at intervals, paying bills on time, opting for moderate credits, maintaining a healthy combination of credits, and avoiding multiple loans, credit cards and new accounts. Maintaining a good credit history/score is important to avoid being rejected by banks.
Yes, there have been cases reported where people have had their loan applications rejected despite having performed well with debt in the past. This is because banks and lenders sometimes erroneously give the wrong information to credit bureaus, who use the wrong information to generate credit scores. It is possible to have this information corrected by contacting the bank and the credit information bureau.
Yes, employers are considering the CIBIL score of a candidate as a measure of stability and reliability. Having a good CIBIL score these days not only helps you get a loan, but also a job.
If the company you work for has defaulted on loans and has dishonoured debt in the past, lenders will have blacklisted it. If you apply for a loan and mention that you’re working for a blacklisted company, lenders will reject your application on the basis that you don’t have a stable job. This is no fault of your own, but lenders will tend to look at applicants who pose the least risk in terms of dishonouring the loan. This is a rejection by association.