BUSINESS
Your credit history, other than your income, is the single most important tool used by a lender to evaluate your application for a loan or credit card.
Your credit history, other than your income, is the single most important tool used by a lender to evaluate your application for a loan or credit card.
So, it’s important that you understand your credit information report (CIR) and what it takes to maintain a credit history, so it is viewed favourably by lenders. You can maintain a good credit history by following these 7 simple rules:
Rule 1: Always pay your bills on time. Late payments are viewed negatively by lenders and may affect the chances of your loan getting approved.
Rule 2: Keep your balances low. While the balances on your loans will only reduce over time as payments are made, you must be diligent about making timely payments on your credit cards. Also, you should control your utilisation. For example, if you have used Rs90,000 out of a credit limit of Rs1,00,000, this may be viewed negatively by a lender. It’s always prudent to not use too much credit.
Rule 3: Maintain a healthy mix of credit. Your credit history should contain a mix of a home loan, auto loan and a couple of credit cards. A high number of just credit cards may affect the chances of a loan approval. Why is it so, you may wonder. Although a credit card offers easy access to finance, it’s also by far the most expensive form of credit. More the number of credit cards with high utilisation, larger are the payments resulting from its high rate of interest.
Rule 4: Apply for new credit in moderation. If you have made many applications for loans, or have recently been sanctioned new credit facilities, a lender is likely to view your application with caution. This ‘credit hungry’ behaviour indicates your debt burden is likely to, or has increased and you are less capable of honouring any additional debt.
Rule 5: Think twice before closing credit card accounts. While using credit cards may negatively impact your credit history, unused credit cards actually imply that you are financially secure. This makes lenders view your application more favourably.
Rule 6: Monitor your co-signed and joint accounts monthly. In co-signed or jointly held accounts, you are held equally liable for missed payments. This is extremely important because your joint holder’s negligence could affect your ability to access credit when you need it.
Rule 7: Review your credit history frequently throughout the year. Unpleasant surprises in the form of rejected loan applications can be avoided by ensuring that your CIR accurately reflects your current financial status. So reviewing your credit history 3-4 times each year is imperative.
Though these general rules are important to keep in mind, each lender has its own policies to sanction a loan to an applicant.
The writer is senior vice president-consumer relations, Cibil and may be reached at creditwise@cibil.com
In next week’s column:
What do you do when you spot a mistake on your credit report? What are the common types of errors? Why doesn’t the credit bureau verify the information with consumers before updating the report?
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