Financial Literacy is an important component of understanding credit. We present Moneylifers with important things that you should know.
FAQ on Credit Scores
Question 1: What does your Credit Score mean?
Credit Information Report contains detailed information of your credit history, including your identity information, credit accounts, loans, payments and recent enquiries. In addition the report also typically has a credit score.
Credit Score is a numeric summary derived from your repayment history of previous or existing loans and credit cards and from the enquiries performed by banks & financial institutions based on your loan application. Your Credit Score is based on the information in your credit information report. Higher the score, the more favourably it is viewed by banks and financial institutions.
Question 2: Would my Credit Score change if there is any change in my Credit Information Report?
Credit Score changes over time, as your circumstances change. For example, paying off a loan could result in a higher credit score, while missing several repayments could reduce it. Every Credit Information Company has a separate range for credit score. There is no standard cut-off for a good score for a loan application.
Lenders set different thresholds for accepting a credit / loan application. These thresholds can also vary according to the type of credit you want, so you could be accepted for a home loan application but your application for a personal loan may be rejected. Lenders may grant someone credit for a credit score of “X” when another bank / lender refuses.
Question 3: What are the factors that negatively impact one’s credit score and how to improve one’s credit history?
Delay in credit card payment, enormous number of application for credit card or loans, delay in payment of EMIs, etc. can affect credit score.
Self-discipline in financial matters by paying back the borrowed amount (EMIs) on time and as agreed to the lender is the foremost step to ensure a good credit score.
#1: Always pay as agreed
All repayments – and missed ones – are recorded on your CIR. Missed payments and high outstanding amounts negatively impact your credit history and credit score. Pay your EMIs and credit card dues on time and as agreed to the lender.
#2: Joint and Guarantor credit accounts
Monitor your joint loans or loans where you are the guarantor regularly, since you are held equally liable for missed payments. Joint holder’s negligence could affect your ability to access credit/loan when you need it.
#3: Credit/Loan applications
Inquiries made by lenders because of an application you made for credit or loan can affect your score. Too many inquiries might mean that you’re taking on too much loan or that you’re in some kind of financial trouble and are looking for credit to help you out. Shopping around for the best deal in terms of best interest rate for home loan or a new auto loan shouldn’t cause a problem but always make sure that the lender knows you are asking only for a quote and not making an application for loan or credit. Checking your own credit report and credit score does not affect your score.
#4: CIR is an important financial tool; don’t ignore it
Get a copy of your CIR soon after you begin using credit & check your CIR annually or after opening new credit accounts. If there is any erroneous data in your CIR, get it corrected with the help of the lender and Credit Information Company (CIC). You must allow time for updates to be reported; creditors typically report updates to accounts once a month to CIC, after the end of a payment cycle.
Building and maintaining a good credit profile will enable you to access credit when you need it without much hassle. If your CIR shows that you repay credit on time, this will usually help you get credit. It may also help you get the best credit deals.
Question 4: What are the major myths or common misconceptions regarding credit history?
Knowledge is power when it comes to getting the credit/loan you want.
Following are some of the common myths (misconceptions) regarding credit information company/credit bureau (‘CIC’) and credit history.
#Myth 1: CIC decides who gets credit
Fact: CICs do not make judgments about the information in credit information report (‘CIR’). CICs simply compile information that is provided directly and voluntarily by member lenders. The CIR is comprised of credit cards, home or auto loans or other monthly payments. Lenders use that information to help them assess the risk of lending to an individual.
Myth 2: CIC denied you credit
Fact: CICs compile and hold your credit report securely. CICs don’t make decisions; that’s up to lenders, who check the information in your CIR along with other information such as items from your loan application.
Myth 3: CIC holds a credit blacklist
Fact: CICs do not hold any credit blacklist. Some factors that lenders do consider include your repayment history and how much you already owe. Lenders want to be sure that you aren’t taking on more credit/loan than you can comfortably manage to repay.
Myth 4: Once a credit score is bad, it can never be rebuilt.
Fact: Credit Information Report (‘CIR’) contains detailed information of your credit history, including your identity information, credit accounts, loans, payments and recent enquiries. Credit can be rebuilt over time. Your CIR indicates which credit accounts are closed or inactive, but the history remains nonetheless. Late or missed payments stay on your CIR as payment history. Rebuilding credit means paying on time and the longer a credit history is without negative information, such as late payments, the better. The older the negative information is, the less significant it becomes.
Myth 5: Checking your own individual CIR affects your rating.
Fact: If you access your own Credit Information Report (‘CIR’), it does not have any effect on your credit score since it is a non-credit enquiry. You reviewing your own CIR will only be seen on a personal CIR.
When you apply for credit/loan you provide consent to the lender to review your CIR, and an enquiry will be added to your CIR. Such credit enquiries are shown to other lenders because they may represent new loan that doesn’t yet show on a CIR as a loan account. Credit enquiries can affect credit scores.
Everyone should check their own CIR at least annually. It’s part of good credit management.
Question 5: Does using credit cards negatively impact one’s credit history?
People use credit cards for varied reasons, from making mobile and utility bill payments to buying expensive gadgets and home appliances. Credit cards are gaining popularity amongst everyone, particularly with the working middle class. Your bank assesses your overall spending limit and issues cards accordingly. It is important to understand that increased credit limit usage or additional lines of credit could have an impact on your credit profile if not handled in a correct manner. Your credit profile that is build up in a Credit Information Company (CIC) is a composite of your credit behaviour with all your banks and lenders over a period of time.
If a card holder defaults on any payments, this will be reflected as a default on the Credit Information Reports. If a stretched credit usage results in over leverage and consequently a delay in repayment this will have an impact on your credit profile and your credit score. The prudent path would be to ensure that you make use of credit limits wisely and typically spend on your card what you can repay to your bank on the repayment due date.
Question 6: How often is the information in the Credit Information Report updated?
In general, members such as banks, financial organizations forward consumer credit information to Credit Information Companies on a monthly basis. The day of the month that each individual member sends updates varies. In other words, the CIC might receive an update from member A on the first of every month and from member B on the 11th of every month, etc. Ideally, the CIR is updated on a monthly basis post receiving credit data from members.