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 you can service. Your information gives the lender 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 your credit score.
A good credit score will vouch for you in many ways when it comes to getting a credit card, a car loan, a home mortgage, etc. Your credit score – a three-digit number – is derived from a detailed analysis of your credit history which includes every major financial step, your overall behaviour in handling money and other valuable assets that you have created, besides your general attitude towards financial obligations including your utility payments. Neeraj Dhawan, Managing Director, Experian India, explained the role of credit reports and scores for home loan eligibility and the top reasons for a poor Credit score.
Top reasons for a poor Credit score:
* Delayed repayments: When borrowers delay in making repayments, it leads to poor credit score. If you have consistently delayed making payments, it can affect your credit score. The more the number of delayed payments, the higher the impact on credit score to the dropdown.
* Multiple loans: Multiple ongoing loans might also affect the credit score, increasing the debt burden and hamper the ability to repay.
* Not having a long credit history: Having a long credit history helps maintain your credit score. If possible, you should keep your old credit cards open rather than closing them to enable you to capitalize on the years of good credit history and repayment behaviour.
* Applying for multiple loans or 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 simultaneously. To avoid triggering hard inquiries due to multiple credit applications, you can download your free Experian credit report and share it with the lending institutions.
* Not reviewing your credit report: A credit report summarises all your personal information, credit transactions, credit accounts, and repayments. Any discrepancy in your credit report can bring down your credit score. To ensure factual accuracy in your credit report, it is advisable to check your Credit Report and Score regularly.