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  • Knowing more about Credit Reports and Credit Scores

    In your financial life, it is highly plausible that the utmost important 3 digit number is nothing else but your credit score. Your credit score has the ability to cause a huge and direct impact on your creditworthiness and ability to qualify for loans, credit cards, etc. The credit score plays an important role in determining the interest amount that you pay every month. Your auto insurance or home insurance is greatly influenced by this particular score. Although credit score cannot be used by any of the employers but the employers can definitely use the credit reports. This, in turn, determines your ability to continue a job for certain companies in selected places.

    What is a Credit Report?

    A credit report is nothing but the history of an individual’s credit behaviour that contains all credit and loan related information. All your loan transactions with credit card companies, banks and other lenders for the past 7 to 10 years are recorded on the credit report.

    Experian, CIBIL and Equifax are the three agencies responsible for the compilations of all your credit reports. These credit report agencies collect all the information from various creditors such as car finance companies, retailers, mortgage lenders, credit card issuers, financial institutions, student loan lenders, etc. Thus, you get 3 credit reports which vary from one another depending on the reports and information provided by the lenders to the agencies. The accuracy of your credit scores completely depend on the credit reports which, again, depends on the information received from the lenders. Hence, it is highly significant that you keep checking your credit reports. You would essentially file a dispute with the particular credit report agency which generated wrong credit reports for you. Make sure that none of your credit reports prepared by the agencies have any error on them, whatsoever.

    There are several ways to improve your credit scores. The following points might help you to understand this in a better way:

    History of Payment

    Payment history is one of the most crucial factors while judging your credit worthiness and determining your credit score. The payment history is a documented proof to show that you have paid all your past bills on time and have a clean track record. You might face trouble if you have made late payments in the past. A good history of management of your accounts and paying all your debts on time proves to the money lenders that you are extremely responsible and can easily handle credit accounts. This suggests that if you go for a loan you would continue to repay the debts with the same amount of responsibility as before.

    Credit History Length

    The length of the credit history analyses the oldest account of yours and also takes into account of the average age of all your accounts. It also examines your recent activity on all your accounts. It takes a long time to create a history if you are absolutely new to the credit world. It is highly advisable that you hold on to an old credit card. This shows the financers that you have a very long credit history associated with your account, even if you are not using the credit card a lot.

    Credit Types

    Having various types of accounts associated with yourself and maintaining them properly helps you to earn a good credit score. For improving your credit score it is very important for you to realize that there are no shortcuts or quick fixes. It will take some time to rebuild a good credit score and establish your credit worthiness. Keep paying your bills on time and ensure that you do not have lot many unpaid debts linked to your accounts. Manage your finances properly and you will definitely earn those credit scores that you wanted.

    Credit Score Monitoring

    Monitoring your credit scores can give you a clear idea about your current standpoint and work accordingly towards improving your credit worthiness for better credit scores.

    What Information is There in the Credit Reports?

    The reports that you get from CIBIL, Experian and Equifax includes the following information that banks and NBFCs pay attention to while determining loan or credit card eligibility:

    • On time payments – When you miss or make a payment, the report is sent to the credit bureaus by the lender. Thus, your behaviour towards the outstanding amount is noted. If the credit report states that you have shown consistency from your end while making payments towards the outstanding loan, then the lenders will feel confident about sanctioning a loan to you. They will feel that you are not a defaulter and will repay the debt on time. However, if the lender notices a pattern where you have failed to make payments on time, then your application might get cancelled. Even if your loan is approved, it will come with a high rate of interest.
    • Credit accounts and credit limit – Any individual using credit must remember to keep the utilisation level low. It is advisable to use a maximum of 50% of the available credit limit. Keeping the credit limit low helps in easy repayment of loans. This helps the individual to manage his/her finances better. If the credit utilisation level is high, it can be difficult for the customer to repay the outstanding amount. Also, when some has too many credit sources, it indicates that he/she is always in need of funds. However, if a person has too few credit sources, then the lender will not get enough information about the repayment pattern of that person. So, maintaining a balance between the number of credit accounts and utilisation of credit limit is the key to get improve the score on the credit report.
    • Age of credit accounts – The repayment pattern can be judged easily if the credit account is active for a long time. In case you have new accounts and not a long repayment history, banks and NBFCs might not be willing to offer you loans. This happens as the lender does not get enough information about your repayment pattern.
    • Credit score – All three credit bureaus (CIBIL, Equifax and Experian) use complex formulas to calculate the scores. The credit scores from 300 to 900 in India. Higher the score, better is your chance to get a loan.
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