7 Factors that affect your credit score Buying Guide

What is a Credit Score?

Credit Score is a numeric representation of your credit summary. It is checked by lenders to know your creditworthiness. CIBIL (Credit Information Bureau India Limited) provides a 3 digit number that ranges between 300 and 900. Closer the CIBIL score to 900, better it is. If your credit score is closer to 900, it is considered good by financial institutions. This is the basis on which banks can grant you loans.  

What are the benefits of a good Credit Score?

• Easy loan approval
• Lesser interest rates on loan
• Easy credit availability
• Increased credit card limit
• Enhanced negotiating options

It’s easy to check your credit reports from each of the three major credit reporting agencies. You’re entitled to a free copy, once a year, under the Fair Credit Reporting Act. These reports can be accessed via AnnualCreditReport.com, the government-mandated site run by the major bureaus. The closer to 900, the more confidence the credit institution will have in your ability to repay the loan and hence, the better the chances of your application getting approved. Anything above 750 is considered a good credit score.

Below is the range of the credit score:

• Excellent Credit: 750+
• Good Credit: 700-749
• Fair Credit: 650-699
• Poor Credit: 600-649
• Bad Credit: below 600

What are the Documents required for application of a credit card?

1. Self-attested KYC documents
2. Address proof: Bank statement, Electricity bill or Telephone bill (Any one)
3. PAN card, Aadhaar Card or Voter’s ID (any one)

Good Credit Score does not guarantee that your loan application will be approved easily. The lender also considers your repayment capabilities before disbursing loan amount. If you have a low credit score, the chances of denial of your home loan is higher. Every lender would want to give credit to a person with high credit score as the chance of remuneration is higher and we often wonder how credit score calculated is. There are various parameters that defines a credit score, and some of the points that can affect the credit score are as below:

Irregularities in payment: A consistent and timely payment history comprises 35% of your credit score. Missing the due date of your credit card bill, not paying equated monthly instalments (EMIs) on time, has a negative impact on your credit history. it takes at least 6 to 8 months for your credit history to improve.

Frequent increase in the credit card limit: An increase on your credit card limit gives you the flexibility of availing more debt but also affects your credit score if not used wisely. Frequent increase in the credit card limit could be interpreted as sign of being dependent on credit to manage expenses.  

All old loans are 'closed': A default lowers your credit score and credit worthiness. If a default is reflected on the credit report, you must immediately settle it and ensure that a closed status is shown. Always ensure a formal closure certificate from the lender. A responsible credit behaviour bags a good credit score.

Error free Credit Report: If there's an error, correct it online by logging in to the credit bureau's website or by sending a duly filled dispute resolution form to the bureau.

Not having a Credit History: If a person doesn't own a credit card or have not taken a loan in the past, then it might make it difficult for the lender to determine whether you fall in the high risk or low risk category. Adding on, as many lenders have started to consider credit scores while fixing interest rates, having a good credit score can help get cheaper loans.

Maintain a healthy Credit Utilisation Ratio:  Another important factor that borrowers need to consider is EMI-to-Income Ratio. As per rules, maximum EMI-to-income ratio is 50%, as lenders assume that half the salary will be required for living expenses. If applied for an additional loan, it will be sanctioned on the basis of an individual's ability to carry an additional EMI burden. The salary in this case is taken as take home salary.

Avoid closing old Credit Cards and carrying too much debt: The length of your credit history is averaged across all of your credit accounts. The older your accounts, the easier it is to get a home loan, therefore avoid closing old credit cards. Likewise, avoid opening any new credit cards or loans if possible as they’ll decrease the average length of your credit history thereby will negatively impact the credit score.

Therefore in order to own a dream house maintaining a good credit score plays a very important role. It is always better to keep improving the credit history that shall eventually result in offering best home loans.