Your credit score is not just a number but an indication of your financial health and a lender looks at it to get an understanding of your loan repayment behaviour and credit worthiness.
If you have plans to buy a house or car this year or in the near future, you must make yourself well-versed with the importance of credit score. Your credit score is not just a number but an indication of your financial health and a lender looks at it to get an understanding of your loan repayment behaviour and credit worthiness. And it’s often used as a determining factor in order to decide whether to extend you a loan or not and even the quantum of interest to be charged.
If you apply for a loan and face rejection due to poor credit score, your credit score is only going to be knocked down further. So make sure you run a soft check online before you go about enquiring for a loan in a bank. Lenders typically consider a credit score of 750 to be ideal. Anything less than that could weigh heavy on you. However, you can always change your fate when it comes to credit score. A poor credit score is often a result of bad financial habits such as late EMI repayments, loan defaults, late or non-payment of credit card bills and so on. And it can be set right by identifying the reasons plummeting your score and fixing them. Let’s deep dive into it.
What could have lowered your credit score and how do you fix it?
Here are some of the common causes for a credit score to drop.
Defaulting on a loan or missing EMI payments repeatedly can lower the credit score of a person, irrespective of whether it’s intentional or not. Your credit score is a reflection of your repayment pattern. One reason for not being able to make timely repayment is if you have taken a loan bigger than what your repayment capacity is. You can put your score back in place if you make regular payment for your existing loans now on. It will reflect in about a few months.
Lack of updates
Sometimes lenders fail to update the correct loan status with the credit bureau, even if you have cleared off a payment that you had missed in the past. This may lead to a poor credit score. It’s important that you take a ‘no dues’ certificate from the lender on clearing off all your dues. So, if your credit report is not updated, you can always follow up on it with the ‘no dues’ certificate.
High credit utilization ratio
Credit ratio refers to the ratio of used credit versus the available credit. And the recommended threshold is 30%. Anything higher may a have negative impact on your credit score. This is because a higher credit utilization ratio shows you to be credit hungry and reflects badly on your credit worthiness. You can fix this by either increasing the credit limit on your card or by splitting your expense across multiple cards, so that your credit utilization ratio stays under control.
Liabilities of being a loan guarantor
If you have signed up as a loan guarantor for someone, your credit score could be impacted by his/her loan repayment behaviour. So any default in loan repayment can plummet your credit score. In fact, if you are signed in as a financial guarantor, the bank is well within the rights to ask you to cough up the defaulted amount. Therefore, it’s important that you know the financial position of the person you are agreeing to be a guarantor for.
Last but not the least, remember a high credit score not only improves your chance of getting a loan in future, but also reduces your cost of borrowing, as a healthy credit score gives you the opportunity to take loan at a lower interest rate.
(The writer is CEO, BankBazaar.com)