Your credit score is one of the most important factors that lenders consider while evaluating your loan or credit card application. Even organisations like the State Bank of India have started using credit scores for evaluating prospective employees.
Debt repayment history
When you apply for a loan, lenders first look at your debt repayment history, i.e., how disciplined you have been in repaying earlier loans or your credit card bills. Credit bureaus give maximum weightage to this, while calculating your credit score. Any default in your debt repayments is reported by your lender to the credit bureaus who then include it in your credit report, which reduces your credit score. It is imperative for you to manage your payments closely.
Length of credit history
Lenders prefer borrowers with a longer duration of credit history. The best way to create a long credit history is to avail credit cards. Using credit cards regularly and ensuring timely payment of your bill will create a strong credit history and will push up your overall credit score.
This is the ratio of the total outstanding balance amount on your credit cards against the total credit limit available on those cards. Lenders use this ratio to judge your credit hungriness. A person with higher credit utilisation ratio is more likely to make defaults than one who uses his credit limit judiciously. Do not let your credit card transactions cross 30–40% of your overall credit limit.
The composition of your credit lines also impacts your credit score. As secured loans are considered as good loans, lenders favour borrowers having higher proportion of secured loans. You could use secure cards which use your fixed deposits as collaterals. As the outstanding balance of a secured credit card is considered as a secured loan, routing some of your credit card transactions through secured credit cards will help manage your credit mix.
Number of loan enquiries
Each time you apply for a loan or credit card, the lender will seek your credit report from the credit bureaus. These bank-initiated credit enquires are considered as hard enquires and are reported to credit bureaus. Too many of these credit enquires within a short period of time will portray you as a credit hungry person and reduce your credit score.
Banks and financial institutions sometimes miss updating repayments or account closures to the credit bureaus. As a result, debt repaid may still show as outstanding. Your credit report may also contain wrong information due to clerical errors by your bank or the bureau. All of these will reduce your credit score and affect your future loan eligibility.
The writer is chief product officer, Paisabazaar.com