When you apply for a loan, the financial institution reviews your credit report to assess how much credit you qualify for and how much you can repay.
This document gives the lender an overview of your identity, your credit history (loans you have taken in the past), your current credit accounts, your payments, your recent credit applications and, of course , your credit score.
A good credit rating will secure you in many ways when it comes to applying for a credit card, car loan, and mortgage, among others. Your credit score, which is basically a three-digit number, is derived from a detailed analysis of your credit history. This includes every major financial milestone and your general behavior in handling money and other valuable assets you have created, in addition to your general attitude towards financial obligations, including your payments for utilities.
But even if you know 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.
Deferred repayments: When borrowers delay their repayments, it leads to bad credit. If you constantly delay your payments, it can affect your overall credit score. The higher the number of late payments, the greater the negative impact on your credit score.
Multiple loans: Multiple outstanding loans can also affect credit rating as it will increase debt burden and hamper your ability to repay.
Brief credit history: Having a long credit history helps maintain your credit score. If possible, you should keep your old credit cards open rather than closed, as this will allow you to take advantage of years of good credit history and repayment behavior.
Application for multiple loans, credit cards: Applying for multiple loans or credit cards sends a message that you desperately need credit. It is advisable to space out your credit card and loan applications, rather than applying at the same time. To avoid triggering difficult inquiries due to multiple credit inquiries, you can upload your credit file and share it with lending institutions.
Not reviewing the credit report: A credit report is a summary of all your personal information, credit transactions, credit accounts and repayments. Any discrepancies in your credit report can lower your overall credit score. To ensure the factual accuracy of your credit report, it is advisable to regularly check your credit report and score.
The author is Managing Director, Experian India
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