Reviewing your credit report not only helps keeping a check on your credit score, it would also give you sufficient time to take corrective measures and rectify errors, if required.
While the RBI’s moratorium guidelines during the lockdown ensured that credit scores of those facing financial shortfalls don’t get adversely impacted, any misinformation or error in your report can still lower your score and even lead to rejection of loan and credit card applications. This may be challenging, especially in case you require urgent funds in the near future.
Here are 5 reasons why you must review your credit report at regular intervals:
1. Indicates your creditworthiness
Credit bureaus calculate credit score on the basis of information provided by the lenders. Apart from being one of the key loan eligibility parameters, credit scores are widely considered for setting risk based pricing and also during recruitment screening in some sectors. Therefore, it is imperative to check your credit report at regular intervals, to get a fair idea about your creditworthiness, especially before submitting any credit application. Reviewing your credit report not only helps keeping a check on your credit score, it would also give you sufficient time to take corrective measures and rectify errors, if required.
2. Helps in timely detection of errors
Any error, whether it’s on the lender or credit bureau’s part, is capable of damaging your credit score. Periodic review of credit report can help spot errors, if any, and have them rectified. Common credit report errors include –
# Error in credit repayment details
Your credit repayment history helps lenders predict your repayment behaviour. While checking your credit report, ensure that information pertaining to repayment is accurately listed and updated.
# Error regarding personal information
Any mismatch in the personal information listed in your credit report and the one mentioned in your credit application may lead to rejection of your loan and credit card application. Reach out to concerned credit bureau if you spot any mismatch or error in your contact number, communication address, name or PAN details.
# Error in credit account details
Given that credit report lists information regarding all the active as well as recently closed credit accounts, any incorrect reporting can harm your credit score. Reviewing your credit report would help check your loan and credit card details to ensure it is error-free and up to date. Contact your credit bureau if you find any missing or unknown transactions or accounts pertaining to your credit report.
3. Identify unknown hard enquiries
Whenever you submit any credit application, the lender pulls out your credit report from the credit bureaus to assess your creditworthiness. Such lender initiated enquiries are treated as hard enquiries, which can lower your credit score by a few points. If you spot any unknown hard enquiry in your credit report, reach out to your bureau immediately and get it rectified.
Submitting multiple loan and credit card applications, especially within a short time-frame, can harm your credit score. Hence, instead of directly submitting applications to multiple lenders, consider applying through online financial marketplaces. While such platforms also fetch your credit report from the bureaus, these enquiries are termed as soft enquiries, which do not harm your credit score.
4. Helps keep a check on your credit utilization ratio (CUR)
Credit utilization ratio is the proportion of credit limit utilized by you against the total credit limit available. As lenders usually prefer lending to credit card users maintaining CUR within 30%, breaching this mark can not only lower your credit score, but also depict you as a credit hungry consumer. Hence, you must avoid breaching the CUR limit. In case you tend to frequently breach this 30% mark, consider either opting for an additional credit card or else request your lender for credit limit enhancement. This would increase your total credit limit, and thereby reduce your CUR, provided you do not increase your spending.
5. Helps to maintain a balanced credit mix
Lenders generally prefer lending to those having a higher proportion of secured loans (like car loan, home loan or loan against property) than unsecured loans (like personal loan and loan against credit card). Credit bureaus too may favourably score borrowers with balanced credit mix. Those who have a higher proportion of unsecured credit can either consider prepayment of your existing unsecured loans, if possible, or opt for loan consolidation, wherein you replace your unsecured loans with secured ones. This would help maintain a healthy and balanced credit mix, which is likely to also have a positive impact on your credit score.
(By Radhika Binani, Chief Product Officer, Paisabazaar.com)