In this blogpost, Swati Mohhata writes all you need to know about credit rating.
There is too much debt floating around in the world today, and people are greatly underestimating the importance of keeping and maintaining a strong credit rating. If we are not diligent and considerate when it comes to making our purchases and fulfilling our financial obligations of credit rating, it can take a substantial hit and our ability to perform a range of financial transactions in the future can be seriously affected.
Credit rating systems
The credit reporting system takes into account not only the negative information that is currently on a person’s credit file but also the positive factors. So everything goes into account when determining the sort of score we have on our file.
In India the average of credit score that lies between 622 and 1200 is generally considered to be pretty good. Any higher on the right track, any lower have a bit of work to do when it comes to getting our credit rating up to an acceptable level.
Negative credit information
There is a range of information associated with our financial history that offers insight into our creditworthiness. These are taken into account in determining our ultimate credit rating:
- Any credit applications and enquiries we have made in the last five years, and whether or not these applications have been successful or unsuccessful and why.
- Payment records from our current credit accounts. Not only does this include our credit cards, but it also includes our mobile phone, gas and electricity accounts.
- And overdue accounts or payment defaults in our history and any failure to meet payments.
- Any bankruptcies or insolvencies we are involved in as well as court judgements.
- A range of public record information, including directorships and proprietorships.
Positive credit information
In India, there is a range of positive credit information that can significantly increase our credit rating and overall perception of creditworthiness – so long as we have been in control of our finances. Some positive factors include:
- The types of credit accounts we have owned such as a credit card or home loan and the record of successfully meeting financial obligations in relation to these accounts.
- Credit limit usages and account balance details.
- Successful repayment history which shows an overall ability to meet our financial obligations.
Ways we can increase our credit rating
It is said, that if found with a low ranking– there are a number of measures which can be taken to significantly improve the score. These includes:
- Applying for a credit card – as long as a person is in the position to make repayments, having a credit card can actually increase the credit rating. Just make sure that all the repayments are made on time.
- Make appropriate applications for credit –submitting multiple loan applications and having them rejected can have a substantial impact on the overall credit rating, so if anyone requires a loan before filing an application make sure that one is in a position to do so. If multiple inquiries have been made in a short span of time, some credit providers may look at it negatively, and this will seriously affect the rating.
- Paying off bills, loans or credit cards –making sure that all different financial obligations are met is quite important when it comes to determining the overall credit rating. If one fails to do so, it can have a really negative impact on his credit rating. Something as small as a 30-day late payment can decrease the credit rating, and if overdue accounts are kept on your file for up to five years, so it goes without saying – don’t risk it; pay on time.
Keep track of our credit report and rating – this is especially important if one has changed jobs or moved house recently, and he should really be checking his credit rating at least every one to two years to ensure there are not any errors that have passed through.
The things we do that affect our credit score and how do we fix them:
Applying for credit several times
This usually involves submitting loan applications to several banks, hoping that one of it will be approved. However, each time we apply for credit, it will be recorded in our credit report, which is noted as an enquiry. A credit can be a loan, mortgage or utility application. If we have made a lot of enquiries in a short span of time, some credit providers may see this negatively and reject our application.
If we continue to apply for credit after we were refused from a credit provider, these enquiries will significantly reduce our credit score.
The Solution is that before applying, research different lenders and choose the most appropriate one to submit our credit application to.
Paying bills, loans or credit cards late
An overdue debt and whether it has been paid on time or not will be listed on our credit report when it is 60 days or more overdue. However, a 30-day late payment may also decrease the score. Overdue accounts are kept on the file for up to 5 years.
The Solution for such circumstances is pay on time, every time. But if we really can’t, make sure to at least pay off an overdue debt within 60 days of getting the first notice of payment so that it doesn’t appear on the credit file. Also, pay the non-overdue debts gradually, as the credit score shows the ability to manage credit and debt, so if paid completely at once, it will be deleted from the report.
Hence, the bills, loans and credit cards can be paid on on time, by using direct debit and scheduling automatic payments from the account.
When a person is not paying his bills or meeting loan repayments
If one refuses to pay his phone bill even after receiving requests from the utility provider , or if the loan repayments are not met, these could be listed as an overdue debt or defaults on the credit report, which will bring down the credit score. Defaults are kept in the file for up to 7 years.
It could be better paying the bill and then disputing the amount after that. However, if we can’t pay our bills or meet repayments due to unexpected circumstances, speak with the utilities and credit providers and see if you can apply for a hardship variation and negotiate a repayment plan. One could also consider consolidating the personal and credit card debts into a mortgage so it can be managed to be paid each month.
Not removing errors in the credit report
If an error is found on the credit report and one chooses to fix it later rather than sooner, the credit score will not improve, and this will affect the future credit applications.
So one can tell the privacy commissioner that there is an error on the file. If we are applying for a loan, tell our lender that there is a correction pending. We will need to prove that the item is not correct, such as a letter declaring that the account is not ours or that it has already been paid. We could also talk to the company who added the default on our file, claiming that we owe money to them. They could have simply mistaken as somebody else who does owe them money.
Not keeping track of your credit report
If have changed jobs or moved house over the years, you could end up losing track of the details in our credit report, which could adversely affect your credit rating.
Other ways to improve your credit ratings
- Get a credit card– If we have and use a credit card, it will build our credit rating and show that we are capable of handling and managing debt. However, remember that every credit we apply for will be added to your credit report and can lower our rating. If we already have a credit card, it’s best to ask for a higher credit limit instead of applying for a new card.
- Use different types of credit– We can increase our credit rating if we can prove that we are able to manage different types of credit and also pay them all on time. For example, using a loan to purchase a car and a mortgage to buy a house.
- Use someone else’s credit– Have someone with a good payment history add we as a credit card holder to their credit account. This way, their payment history will be included on our credit report as well, giving a perfect account. If the account is open for a long time, it will also show a long history of managing it well.
- Keep unused accounts open– Even if we have paid off our credit card, don’t close the account. Keeping the account open without negative reports over a long period of time will have a positive effect on our credit rating,
Therefore the higher our credit rating, the higher our chances are of getting our credit application approved.