There are many instances where a borrower has sound income sources to justify any repayment commitments and there are enough collateral to make him/her eligible for a desired loan amount, but due a devil in his/her fate every time the application gets rejected. And the devil is none other than a low credit score in the records of Credit Information Bureaus.
If you do not know, a credit score is generally a three-digit number within the range of 300 and 900. Higher the score the better it is. This score will reflect information from several lenders and across various loans. The reason for low scores in the credit information report can be anything, such as;
You might want to read; Know your CIBIL CIR and Credit Score
Past Defaults in Payments: Whether you have a bigger loan like home loan or mere credit card dues, any default in payment badly impact your credit score. You might ignore, but it’s true that even late payment or part payment out of full due amount of credit cards also affect your credit scores. There may be cases where you have some payment dues, but you never bothered to clear the same. After a long follow up for payment of dues finally bank gives you an option of “settlement” at least and you go ahead just to get rid of continuous calls/follow up. But remember, this badly impacts your profile as BANK send a negative feedback to CIBIL as SETTLED not CLEARED even though they stopped bothering you.
Frequent Loan Enquiry: If you are one of those who has a habit of doing lot of enquiry, but implementation is less, then I must say; stop doing it for loan enquires at least. It doesn’t matter whether you call for your own requirement or any near and dear’s need. Too many entries in the enquiry information section of your credit report add negative values to your credit scores.
Too Many Credit Cards: Having too many credit cards also spoil your chances of getting loan as bank doesn’t like credit hungers. Bank observes your spending habits which may depicts you already have high amount of spending commitment then how will you manage new loans repayments. Balance transfer, cash loan on cards or frequent conversion of purchases into EMIs, also get recorded in your CIBIL report which leads to reducing your credit scores further more. Even 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 chance of repaying the loan.
Ignoring Past Discrepancies: If you have ever spotted any error or fault from lender/bank side for a non-payment, default in loan repayment or credit card dues, you should immediately approach the lender or a credit information agency to get it rectified. Errors are bound to happen due to incorrect reporting by lenders or due to human errors. Ignoring such discrepancies in credit information reports or credit card and loan repayment records may come back to haunt you later.
Become a Loan Guarantor: I am not saying becoming a loan guarantor would affect your credit score. Of course a guarantor plays an important role for approving a loan to borrower. This means when you guarantee to honour the obligation if loan taker cannot repay. So what if you have guaranteed a loan and it hasn’t been back paid on time, it will impact your score.
It’s rightly said by someone “Credit Score isn’t like a race car, where you can rev the engine and almost instantly feel the result”. Actually these scores are more like your driving record; They take into account years of past behaviour, not just your present actions. Your CIBIL credit score is a record of your credit history i.e. past loans or credit cards availed from various lenders/banks who are members of CIBIL.
Now let us find out what you need to do to improve your credit score.
Pay the balances of your Credit Cards or Keep it Low: Keep balances low on credit cards and other “revolving credit.” High outstanding debt can affect a credit score. Reducing your overall debt that’s on your credit report is a very effective way to push up your credit score. But if you don’t have the funds to do that, consider taking a loan from a family member or friend. That doesn’t reduce what you owe, but it does move debt off your credit report and give your credit score a quick boost.
Maintain a good Credit Mix: It is advisable to have a good mix of secured such as; home loan, auto loan and unsecured loans like, personal loan, credit card etc. But if your credit portfolio is more inclined toward unsecured loans, banks/lenders may view this negatively.
Fix Errors or Discrepancy: Check your credit reports and correct errors and discrepancies. You need to report all these issues to CIBIL as soon as you see. This needs to be supported with valid proofs. In case you are not satisfied with the action you can lodge a complaint with the banking ombudsman’s grievance cell, which will take up the issue and evaluate it from a neutral stand. Also Keep track of add-on credit cards and monitor joint accounts as the other holder’s negligence can impact your access to credit.
Don’t simply cancel unused Credit Cards: When you cancel credit cards, even unused accounts, you effectively erase the length of payment and account history. A better strategy is to occasionally use your older credit cards so the issuer doesn’t stop reporting your information to the credit bureaus. Having a long credit history helps increase your score.
Don’t hurry to build your Credit Score: You don’t rebuild the credit score; in fact you rebuild your credit history, which then is reflected by your credit score. Thus opening multiple loan accounts, applying credit cards in a short period of time may boost your available credit, but it sends the wrong message to potential creditors, as it makes you look desperate to get credit from any available source.
You might want to read; What should be your deciding factors before applying a Credit Card?
Pay your dues in full: Every due bill will show you a minimum amount due. Don’t get excited that the amount is much lesser than what you actually owe the bank. Always pay your entire amount, because the remaining amount will show as overdue in your CIBIL score, which could hurt your score dearly. Also the banks will charge interest on the entire amount even if you pay minimum amount due. Paying your dues on time and in full is the most important contributor to a good credit score. Even if the debt you owe is a small amount, it is crucial that you make payments on time.
The advantage of a good credit score is that you can use it as a weapon to fight with lenders/banks to negotiate for a more favourable interest rate.