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18 Aug

Credit Scores And Their Significance

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A credit score is a numerical representation of your ability to repay loans taken from an NBFC,Financial Institution or Bank. It is a summary of your past credit history that helps build a detailed credit report. The scores usually range from 300-900, wherein a score of above 750 is considered good by almost all lenders and for almost all types of loans. The higher your credit score, the easier it is for you to obtain a loan. Your credit score is determined after analysing various factors, a few prominent ones our:

1. Re-payment History
Past records of loan re-payment are is a very critical parameter for assessing your credit borrowing history. NBFCs and lenders pay special attention to this point, and timely payments result in a higher score leading to quicker and hassle-free approvals for new loans. 

2. Outstanding Debts
NBFCs and lenders take un-serviced debts very seriously. Your credit score could take a major hit with a high amount of un-serviced loans, as it signals an inability to repay debts, such as, unpaid loans, overdue credit card bills or EMI's and more.

3. Duration of Credit History
It takes some time to build a satisfactory credit history which clearly demonstrates good financial management. This time frame could range from a few months to a few years,
depending upon your credit mix, utilization, repayment patterns and more.

4. Credit Mix
Credit scores are also affected by the mix of various credit products that you are using. A balanced mix is favourable over an excess of one type of debt. There are a few types of financial transactions which usually don't affect your credit score, such as phone bills, rental payments, payment of insurance premiums, etc.

 

 

How to check your credit score
Credit Information Bureau of India (CIBIL), now known as CIBIL TransUnion, is a credit scoring agency that helps determine your credit score and ways to improve a low or less than favourable credit score. They maintain individual finance data for a period of 7 years. You can also check it online or submit an application. Other credit information companies like Experian, Equifax and High Mark also do a great job in this field. Having a good credit score is essential as it will help you get best deals on credit cards and loans. You can even negotiate better interest rates and repayment options with your lenders.

Why do you have low credit score?
As discussed earlier, there are a lot of factors affecting your credit score. However, even if you are taking corrective action and your score is not improving, then you should have a look at the reason below:

1. Mismanaged credit card bills
If you cross about 30% of your credit limit, chances are that it will result in a lower credit score. Accumulated or late credit card payments are valid grounds for a reduced credit score.

2. Unsettled dispute with a credit card or loan company
The term 'settled' has negative connotations. It could mean that the lending company or credit card company had to forego some part of their payment because you weren't able to repay on time. This can adversely affect credit scores, ensure that all debt types are fully paid.

3. Reporting error
Sometimes, the credit report may have a few errors. An error as small as a spelling mistake in your name can change your credit scores and history. Read your credit report thoroughly and use the dispute resolution mechanism for closing any reporting error.

4. Making frequent minimum payments
Paying on time is great but scraping by with frequent minimum payments is not seen positively. Working towards paying off debt, takes time, effort and commitment.

A good credit score can help secure quick approvals on your loan and mortgage application for personal and business uses. There are some quick ways to improve your credit scores, such as:

1. Pay your credit card bills and loan EMIs on time
These payments will have a direct impact on your credit scores. Make sure that you stick to the schedule and make these payments in full and on time. Missing a payment or making late a payment is highly unadvisable.

2. Credit card utilization
Try and keep your card utilization rate below 30%, this would help better your credit score

3. Secured & unsecured debt
A healthy mixture of secured & unsecured debt helps ramp up your credit score. For example, credit cards are unsecured debt while car loans are secured debt.

4. Close out loans where relatively small amounts are left
Your credit score will also depend on how long it takes you to repay a loan. Close out all outstanding debt before you go for a loan as it will reflect well in your credit score.

A good credit score is essential, as it allows quicker and cheaper access to funds. Make sure you follow these steps to maintain a good credit score.

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Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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