When you seek a loan, the financial institution screens your credit report to evaluate the amount of credit you are eligible for, and the amount that you can service.
This document gives the lender an insight into your identity, your credit history (the loans you have taken in the past), your ongoing credit accounts, payments, recent enquiries for more credit, and of course, your credit score.
A good credit score will vouch for you in many ways when it comes to applying for a credit card, a car loan, and home mortgage, among others. Your credit score, which is essentially a three-digit number, is derived from a detailed analysis of your credit history. This includes every major financial step and your overall behaviour in handling money and other valuable assets that you have created, besides your general attitude towards financial obligations, including your payments for utility services.
But despite knowing these pitfalls of a bad credit score, you too could end up with a bad score.
Here are some of the reasons that could affect your overall credit score.
Delayed Repayments: When borrowers delay in making repayments, it leads to a poor credit score. If you have consistently delayed making payments, it can affect your overall credit score. The more the number of delayed payments, the higher will be the negative impact on your credit score.
Multiple Loans: Multiple ongoing loans might also affect the credit score, as it will increase the debt burden and hamper your ability to repay.
Short Credit History: Having a long credit history helps in maintaining your credit score. If possible, you should keep your old credit cards open rather than close them, as it would enable you to capitalise on the years of your good credit history and repayment behaviour.
Applying For Multiple Loans, Credit Cards: Applying for multiple loans or credit cards sends out a message that you are desperate for credit. It is advisable to space out your credit card and loan applications, instead of applying at the same time. To avoid triggering hard inquiries due to multiple credit applications, you can download your credit report and share it with the lending institutions.
Not Reviewing Credit Report: A credit report is a summary of all your personal information, credit transactions, credit accounts, and repayments. Any discrepancy in your credit report can bring down your overall credit score. In order to ensure factual accuracy in your credit report, it is advisable to check your credit report and score regularly.
The author is managing director, Experian India
(Disclaimer: Views expressed are the authors’ own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)