CREDIT SCORE
Every time a person applies for a loan, the lender checks the credit score and conducts a thorough enquiry. Excellent credit scores ensure positive results in loan applications, and low credit scores result in rejections. Credit scores, though seem a little challenging to maintain, can be appropriately built by merely being regular and responsible in your payments and expenditure.
What is a Credit Score?
A credit score is a numerical marking system based on which a loan is granted. Banks do not approve loans for people with a low credit score. Credit scores are built by making payments on time to prove that you are capable of returning the borrowed amount. The CIBIL or Credit Information Bureau India Ltd. keeps track of the credit score of citizens of India.
The Range for Credit Score
Credit score varies from 0/-1 to 900
-1/0 score – Means that the person has no credit history.
300-500 – Bad credit score. The person is unlikely to be approved for a loan.
551-649 – Poor credit score. The person might be approved for a loan.
650-699 – Fair credit score. This is an average credit score, it's easy to drop below from this, and the person must be careful.
700-749 – Good credit score. The person can easily apply for loans and is very likely to be approved.
750 and >750 – Excellent credit score. A credit score in this range means that the person is very punctual with their returns.
Factors That Affect Credit Score
Certain factors affect the increase and decrease of a credit score. They are:
The first factor is past credits, whether the amount was paid in full and on time or are there any discrepancies in the credit history of a person. Any disparity in the past can result in a lowered credit score.
Second, the remaining debt is checked. The amount remaining to return the debt as well as the amount that has been paid back. The time taken to pay the said amount.
Third, the types and number of loans a person has taken. Credit score falls if suspicion arises or if the person is irresponsible in paying the loans back.
Fourth, how long has the person been maintaining their credit?
And finally, whether the person has applied for a new loan or has previous unpaid debt.
How to Maintain a Credit Score?
A credit score is easy to maintain and very easy to sabotage. A few unpaid/late payments or any suspicious activity can affect the score badly. The following things must be kept in mind if you want to maintain a good credit score:
Regular payments
Making regular payments on credit cards and previous loans are a vital factor. These affect your credit score the most. If a person has difficulty in making EMI payments and credit card bills, they should not take a personal loan as non-payment or late payments will decimate your credit score. It would help if you try not to default on even the smallest payments.
Take the loan amount with care
Do not make hasty or greedy decisions while choosing the loan amount. Decide on a suitable amount that you can quickly return. Otherwise, the credit score will drop and prevent you from future loans.
Avoid prepayment of loans
Do not rush into paying back the loan amount, if you want to build the credit score. On-time payments are the best if you're going to increase your credit score. Varying amounts might hurt the credit score.
Avoid numerous loans
As credit score build-up, a person gets eligible for more and more loans. Although it is tempting, getting multiple loans must be avoided as each loan comes with an enquiry. Too many enquiries will result in you appearing as a credit-hog in front of the banks.
Ensure less expenditure
For the best score, a person should spend under 50% of their credit limit. Spending less credit implies that the person is responsible about their finances. It shows that they do not waste and can be trusted.
Don't apply after rejections.
If a person with a low credit score applies for loans in a lot of places and receives a rejection, their credit score is affected very negatively. With each new application, the credit score drops.
Avoid bulk return
If you aim to build an excellent credit score, do not return the loan amount in bulk before the loan term ends. Even if you have the means to pay the remaining amount, try to pay only the required instalments on time.
Check your paperwork
A lot of times, a clerical error can cause a drop in credit score. Maintain your credit records and ensure that each payment is correctly updated on your record. There have been many instances where people have fulfiled their payments, but their record shows faulty payments.
In the current economy, it is essential to try and maintain a good credit score. Good credit scores make people eligible for all kinds of loans like housing, vehicle, business, personal and education. A person does not need to have a lot of money to have a good credit score, as long as they are responsible in payments and process them on time, a healthy credit score can be maintained.
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