Your credit report and score are influenced by various factors.Understanding these factors can help you manage and improve your credit. Here’s an in-depth look at them:
1. Late payment / missed payments
- The main reason for a low credit score is not paying loans on time.
- Missing or delaying payments, like just paying the minimum now and the rest later, can lead to trouble.
- It might save you from late fees, but the interest keeps piling up. Plus, your bank tells credit agencies about it.
- Your credit report and score start looking bad because of these late or missed payments, especially for home loans, car loans, and credit cards.
- If you’ve been missing payments, it’s time to change. Promise to pay on time, be consistent for 1-2 years, and your credit score will bounce back.
2. Higher percentage of unsecured credit
- Having a lot of unsecured debt, like from credit cards and personal loans, is not good.
- If, out of Rs. 1,00,000 debt, Rs. 80,000 is from credit cards and personal loans, that’s 80% unsecured debt, and it’s a problem.
- High unsecured debt suggests you rely a lot on quick credit for emergencies, which isn’t great for your credit score.
- A mix of credit types is better. If you have a home loan, education loan, and a credit card, that’s good. But having too many personal loans shows too much dependence on one type of credit. Keep it balanced for a healthier credit score.
3. Too many inquiries in short span of time
- Asking about credit too often in a short time isn’t good.
- If you’ve checked on credit cards, personal loans, and car loans in the last 3 months, it shows you’re really eager for credit.
- Spread out your inquiries; don’t apply for different loans all at once. Having a gap between each inquiry looks better.
- Remember, every inquiry is noted in your credit report. If it’s full of them, your credit score won’t smell nice! Lenders might question if you can handle payments when you seem very reliant on credit.
4. Settlement of your loan or running away
- The worst thing you can do is take on too many loans and then can’t pay them.
- Some either run away (called “written-off”) or just pay a bit and settle (called “settled”).
- This messes up your credit report for years. You won’t get loans, not even for a tiny credit card. It’s tough – you’re treated like you’re worth nothing. Avoid this mistake at all costs.
5. Already having a lot of credit
- Everyone has a limit for how much credit they should take compared to their income.
- If you have lots of personal loans, credit card debt, a home loan, and more, it’s a sign you’re relying too much on credit.
- Lenders don’t like it. It suggests a higher chance you might not be able to repay if they give you more credit. Be mindful of your credit limits to keep lenders interested.
6. Growing credit over time
- If your overall loan amount keeps going up, it’s a red flag that something’s off.
- It could be due to late payments and continually taking on more credit.
- For example, if you use your credit card each month but don’t pay it all back, your total owed keeps growing. Over time, this isn’t good.
- Lenders prefer to see your overall debt decreasing, not increasing. It’s not just about taking more credit; it’s about how you manage what you already have.
- If you borrowed Rs. 1,00,000 and paid it off, great! But if your debt goes Rs. 50,000, then Rs. 60,000, then Rs. 80,000, then Rs. 1,20,000, it sends a concerning message. Keep an eye on the trend!
7. Length of your credit history
- Having a longer history is better, even in credit.
- Someone with a solid 5-year credit history is more reliable than a person with just a good 1-year history.
- Similarly, if you had a few rough months but it’s over a short 6-month period, it’s seen as less concerning than a 3-year bad repayment record.
- So, the length of your credit history is important for a good credit score and report
8. Utilising your full credit limit each month
- If your credit card limit is Rs. 50,000, and every month you use Rs. 40,000 or Rs. 45,000, it’s not great for your credit score.
- Even if you pay on time, it looks like you’re relying heavily on credit. Try to stay between 30%-40% of your limit; it’s seen as positive.
- If you have two cards, like one with a Rs. 10,000 limit and another with a Rs. 10,000 limit:
- If you spend Rs. 9,000 on the first card and nothing on the second, your utilization is 90% on the first card and 0% on the second, not good.
- Spend Rs. 5,000 on the first card and Rs. 4,000 on the second to have 50% and 40% utilization, seen as positive on both. Keep it balanced for a better score.
9. Co-signed & joint loans
- Have you vouched for a friend’s or relative’s loan or applied for one together?
- If yes, know that you’re in this together. Everything—good or bad—affects your credit score and report.
- Sometimes, if the main borrower doesn’t pay, your credit report gets a hit too.
- So, be careful before agreeing to be a guarantor!
It’s essential to regularly check your credit report for inaccuracies and take steps to address any issues. By responsibly managing your credit and paying bills on time, you can build and maintain a healthy credit profile.
Disclaimers:
An investor education initiative By Findola Wealth Research Team.
This article is generated and published by Findola Wealth Research Team.
Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.
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