Monday, April 30, 2012

Credit Score

It is derived from the 'accounts' and 'enquiries' sections of your Credit Information Report. Different credit agencies have different marking systems. For instance, CIBIL's scores ranges from 300 to 900 points while Equifax India's ranges from 1 to 999 points. The closer your score is to the upper limit, the better. Sometimes, one may get a score of NA or NH, meaning you're either new to the credit system or you're in the ownership category where you have access to credit but aren't responsible for paying back the loan. So lenders may hesitate to give you a loan if you don't have a credit record.

Financial Institutions check your credit score before extending you a loan. Apart from common mistakes, here are some moves that affect your credit. So beware

Bankers won't like it if you are 'credit hungry'. Applying for too many loans within a short period or having too many credit cards can go against you and may spoil your chances of getting a loan. This is because it is a sign of desperation and will have a negative impact as well. Access to multiple lines of credit, which may include unused credit cards, also impacts the score as it signals over-indebtedness.

Don't be surprised if your application is rejected if your friend did not repay a loan you stood guarantee to. Credit information bureaus classify ownership of a loan, that is, the responsibility of repaying, into four categories -- single/individual (you are solely responsible for paying), joint (you share responsibility with someone), authorised user (when you have access to credit but are responsible for paying, as in add-on credit cards) and guarantor (when you guarantee to honour the obligation if loan taker cannot repay). So if you have guaranteed a loan and it hasn't been paid on time, it will impact your score. Keep track of add-on credit cards and monitor joint accounts as the other holder's negligence can impact your access to credit.

Frequent use of full credit card limit will be a red flag for lenders. The figure appearing under Current Balances of the "Account(s)" section of your credit report helps the loan provider evaluate whether you'll be able to pay additional EMIs. A lower balance means you have a better change of repaying the loan. While high credit card spending may not necessarily be bad, an increase in the current balance on the card over time indicates a higher repayment burden and may negatively impact the score. Your repayment pattern and track records also influence the score. The payment history appears in the "Account(s)" section of your credit report. The Days Past Due, or DPD, shows how many days a payment is late that month. Lenders view anything other than zero negatively.

Things such as how old your lines of credit are and the quality of the mix can make a huge difference. Credit is categorised into secured loans (backed by collateral) and unsecured loans (not backed by collateral). Loans that create an asset, for instance a business, house are considered secured, while credit taken for consumption, such as personal loan or credit card spending, is unsecured. A high share of unsecured credit affects the customer's profile. This is because this means large payouts are due owing to the high interest rates on these loans. Therefore, chances of default are higher.

Ignoring discrepancies in credit information reports or credit card and loan repayment records may come back to haunt you later. If you spot a mistake, you can either approach the lender or a credit information company to get it rectified. However, it is better to approach the bank as a credit information company can't make any change in the report unless it gets the lender's written approval. So don't overlook on anything which you think is not right.

Though, as of now, mobile phone bill payments do not get captured in the credit information, there is a possibility of it getting included in the near future. According to the Credit Information Companies Regulation Act of 2005, telecom companies are allowed to access an individual's credit report. However, there is no provision for telecom companies sharing data with credit information companies. So do not overlook this bill so that you will be able to meet the future requirements of your credit scores if regulation do get updated. To keep this account pristine, comply with current rules and use all official channels to settle disputes rather than just refusing to pay your bill.

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