Will my credit score be affected if I inquire frequently?

Taking loans to fulfil immediate financial requirements has become quite common. With this the importance of credit score has also increased manifolds. People have realized the importance of keeping the score high so that they get approved for loans easily, get the best credit card offers and the lowest interest rate possible. Even people who do not plan to take a loan in near future are keeping a check on their score, so that they don’t face any problems in future, if they need funds in case of an emergency.

Enquiring about your credit score helps you gauge your current situation, identify accounts that may be causing damage and find out ways to improve your credit profile. But some people have a misconception that such credit enquiries can damage your credit score. It is a complete myth that checking score frequently harms your score.  There are some credit enquiries that are not good for your score. But those are hard enquiries. When you check your score yourself it is known as a soft enquiry. Let’s explore what hard and soft enquiries are in more detail.

When you submit a loan application, the lender requests for your credit score and report from the credit bureau. They use this information to analyse your past borrowing behaviour.  Based on your score, they estimate the risk they are exposed to and accordingly decide whether to approve or reject the loan application. This score is also used to set interest rates and other loan terms. This type of enquiry made by the lenders is called a hard enquiry. All these are listed in your credit report and make up 10% of your score. While a single enquiry may result in only a slight dip, frequent hard enquiries indicate that you are applying for credit frequently. Such a credit hungry behaviour isn’t good for credit score. So one shouldn’t apply for multiple credit cards within a short span of time.

Soft enquiries include credit enquiry made by landlords, employers and insurance companies.  Since these situations do not lead to accumulation of debt they do not affect your credit score. Even the background check made by lenders for preapproval of loan is a soft enquiry. A check made by credit card companies to see whether you qualify for promotional offers is also a soft enquiry. Similarly checking your own credit report is also counted as soft enquiry. Soft enquiries are not listed on the credit report and they are not factored in credit scoring models. Hence, they do not affect score negatively.

In fact checking your score is a good practice, it is often the first step in improving it. It helps one do a reality check as to how one’s credit habits are affecting the credit profile. In order to encourage people to take their score seriously, RBI has mandated the bureaus to provide a free credit report every year. Checking the report frequently also helps in keeping problems like identity theft at bay. One must check the free credit report every year to uncover any mistakes or inconsistencies.

So go ahead and check your free credit report as and when you want to. It will not have any negative effect on your score. In fact you can get a free credit report from each of the three bureaus every year. So you can check your report for free thrice in a year. It is a good way to keep track of your financial health.

If there is a sudden drop in your score, it may be either due to recording of incorrect information or misuse of identity. One can report such issues to the bureau and ask them to rectify the mistakes. Taking a peek into one’s credit score also motivates one to take actions to bring positive changes to the score. If you are working towards improving score a regular check will help you see the results of your efforts.

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Will My Job Hurt My Credit Score?

Money is an important aspect of life. You almost need money to complete every task in life. Where do you get the money from? That’s right, by doing a job. A good job can determine what you do, where you stay, what you wear and how your lifestyle can be. Your job can impact you in lot of ways both directly and indirectly.

Will it impact your credit score? Absolutely not! Your jobs, the designation, take home salary, bonuses, etc. does not get reflected in your credit report. This does not mean your salary does not have power on your loan buying process. For example, you are applying for a credit card; the lender will ask you for your annual salary to set a credit limit on your card. This way your job indirectly contributes when you apply for a financial product or a credit line.

So what exactly may hurt my credit score?

Payment history, debt levels, age of credit, types of accounts and inquiries on your credit report are the five main factors which contribute to your cibil score. Your employment status, your incomes and gains are never reported to the bureaus.

If unfortunately you lose your job for some reason, that can indirectly affect your credit score and you will end up on the loan defaulter list. Losing your job can be a saddest thing that can happen to you. You join a firm with a lot of confidence expecting your position will be intact, but when a bomb is dropped on you of unemployment, you are shattered everywhere.

Let us see how a job loss can indirectly harm your credit score,

Behind on loan EMIs and credit card payments

There is a famous proverb stating “Money brings Money”. When you happen to be in a job, there are a lot of bankers and card lenders who offer you different financial products like loans and credit cards. Though we know, they are just our want not need; even then we tend to go ahead with it. Because you have a stable job and a fat cheque, you start spending and get used to a lavish lifestyle. After losing your job, you realize that the EMIs are pending and the credit card bills are overdue and you have no money to make the payment. This will definitely result to a dip in your credit score.

Take new loans to pay your bills

Now that you know that you are in deep trouble financially after losing your job, you will opt for a new loan. A new loan will come with new terms and a new EMI, because it is an urgent requirement you may end up paying more processing charges than usual. You may also try to get in touch with your credit card vendor and ask for a limit raise. Limit raise totally depends on the sole discretion of the card lender, who will check your cibil score first and then think of giving you a limit raise.

 

Unexpected expenses

Trying to close one financial hole after another can be stressful but if in between this process something unexpected happens, like a family member needs medical attention then you are in for another problem in your life. This will result to you finding another loan to fill this gap.

A job hunt

Maintaining a good credit score is really important, even if you have lost your job. Many employers check your credit report to understand your financial capability and determine if you are job worthy. A bad credit score can cost you your next job. So no matter how bad your financial situation is, always pay all your debts on time.

You should always save money and keep some amount as reserve for unexpected events in life. Even if you lose your job, the reserve money can help you keep going for at least till the time you find another job. Spend less, always focus on what you need rather than what you want, this will definitely help you in long run to save money and live in financial harmony.

What Is A Credit Score?

You are planning to take a loan for the most favorite car you had thought once buying or a house you always had imagined or the business you wished to expand, would take you to a journey of going to banks, making inquiries, checking the best quote and the interest rate offered to you and then finally deciding which option would suit you the best in terms of tenor, rate of interest, processing fees and pre-payment charges. Now the point is, how do banks or non-banking financial institutions decide the rate of interest or other charges? What are the criteria?

Suppose you and your friend went to a bank. You both earn almost the same, your age is same, the family background is also similar. And you both apply for the same loan is the same bank. But you were offered 11.5% interest rate whereas your friend was offered 10.25% interest rate with little lesser processing fees and pre-payment charges. Now that would make you think if the external factor looks the same, why are the other things different? So you finally decide to know the details deeply of why your friend was given lower rates than you. And here would be the analysis of what you would get.

You had never done a CIBIL Score Check. Which is one of the major factor of the interest rates being processed? Lower the credit score more is the interest rate and vice-versa. The credit score ranges from 300-900. Where 300 is the lowest and 900 is the highest. Any sore beyond 750 is considered a good score. People below this score are considered red zoned, and the one above 750 are greed zoned. It’s not that, if you have a score below 750 you will not get a loan, but the % of interest will be higher. Now let us take into consideration that why is the score low or high? Basically, what are the factors that decide the score? There are 5 factors whose combination results in the score.

  1. Payment History (35%)

The major factor which determined your credit score is the payment history. How well-organized you are in making the payments of the credits you have taken, shows how responsible you are. Banks can make a note of your previous payments and decide if you will be an asset for them or not. If previously you have made blunders in payments or didn’t pay regularly, the score dips badly and makes it difficult for you to get a loan. If the score is not good, and it’s becoming difficult for you to get a loan; in that case, you can try for loans for bad credit. But ultimately the loss will be yours only.

  1. Amount owed (30%)

The total amount which is taken by you, in any means of the credit i.e. by credit card or a loan also has second major thing determined in the score. The amount of the revolving credit and the fixed credit is in the amount owed.

  1. Length of credit history (15%)

How long is your credit account active, and how old is your account also determines your score. Some people make the mistake of closing the older accounts thinking they are not of any use but that creates a dip in the score. So,  keep the accounts active.

  1. Types of Credits (10%)

There are 2 types of credit. Fixed or installment based credit and revolving credit with a mix of secured and unsecured credit. The type of credit you have will also contribute in the score. It’s healthy if you have a good mix of all types of credit.

  1. New Credit (10%)

The new credits you take is also a determining factor of your score. New credit means you are becoming more responsible towards your repaying responsibility. But do not overdo, else this would also hamper your score.

Always manage the credits you take responsibly. If you check your score and you feel there is some mistake, get a detailed report and check. Work with that diligently and patiently to get your score in green zone!

Why Should I Check My Credit Score?

While dreaming big, on buying things, it all revolves around how much money do you have. Nothing is for free! Whether you are planning for a house or a bike or a vacation or gold or the property, things are expensive. On a larger picture of say 10-15 years down the line, you see yourself achieving the dreams of properties or asset you want to acquire. But what if you want them now? The answer to this now is credit. Credits are available these days on an easy base compared to how they were earlier. The credits or the loans are a nice way of living your life now compared to how you had decided a few years down the line. Its not something that is offered to you for free. But it’s the plain logic of getting the amount of money in advance where you will repay it later with the interest on the amount. But in all, it’s a help which is to be got from banks or NBFCs or Private Lenders. It’s also safe to get it from a trusted party in order to get away from any chaotic situations later if you have borrowed the money from your friends or relatives.

How can one get these credits or the loans? With the standard procedures, you go to the bank, ask for the loan and know the details. The bankers would want to know the type of loan you want, amount of loan required and the tenure for the same. Once they get this detail, your credit score is checked. According to that, the loan amount is sanctioned and rate of interest is decided. Now banks can get the credit score when an applicant comes to them for taking a loan. But, is there any requirement for you to know the score?

Yes, it is really important for one to know the credit score. There are many reasons why you should know the credit score and check it periodically. Let’s look at them turn by turn.

  1. To stay credit healthy

                 We always take care of our physical health or financial health or emotional/mental health. But what is credit health? Credit health is a much talked upon topic these days. By the word credit health, means your credit report should be good. Your credit score should be 750 or plus. It takes efforts to stay credit healthy. You need to make proper payment on time of the credits you have taken from banks via loans or credit cards. You need to think and use the credit you have received else you can get into loan defaulters list. This is not much of a task, is it?

By checking your credit score regularly, you will come to know if your score is the same, or it has gone down or it has been increased. A regular watch will be an add on to the work you are doing in maintaining the credit health.

  1. To check if everything is in place on the credit report

                 If you have applied for a credit card, and it gets rejected saying your credit score is low. How would you deal with the situation? When you had checked the score last time, it was good enough and hence after taking a lot of time to think, you applied for the credit card. But what happened? It is advisable to check your credit score every 6 months. There can be a possibility if some one has stolen your identity, i.e. its an identity theft case wherein your details are used by someone to take loan and you are completely unaware about it. Or there are some mistakes in your report and you are clueless as you have not made those payments. So, in that case, you need to raise a dispute.

In any of the case, if your score is not reflecting how you had thought it should be, you have to check the score.

  1. Keeping an eye

Either you are new to the credit score or you are trying to repair the credit score, in either the case it is important to check the credit report regularly. RBI has passed a rule of giving 1 free credit report per year to any individual to all the bureaus. Make the use of such advantage and keep an eye on the score.

In any of the cases, to stay updated is best. If you are going through a new built or repair, regular checks are important. Don’t be lazy in such things and stay credit healthy!

How Will Identity Theft Affect My Credit Score

Sneha, a well-settled entrepreneur, at 31 is well settled in Pune. She owns a house, two cars and few properties. These are solely her properties. She stays with a small family of 3, She, her Husband and a Daughter. She has put in a lot of efforts, in building the empire of her business and the properties she owes. She is a regular checker of her credit score and has made no defaults of any loan she had taken or any loan she has today. She has never made any late payments of any of the credit cards she peruses. Her credit score and credit report, both are in place.

A free CIBIL report is given every year by the bureau as per RBI regulations and she has taken well advantage of it. Now, she is planning for a business expansion. She goes to a bank and applies for a business loan. She is very well aware that a business loan is the unsecured – installment based loan. But with the past records and the payment history she has maintained, she is confident enough that her loan will get approved. While the finalization of the process, her loan was rejected. As she is a very old client, the bank manager explained to her that there is the cibil score goof up, and it has gone tremendously down in last 3 months. With looking in details, they came to a conclusion that it was a case of identity theft.

Let’s understand in detail, that what is identity theft. In this digital ear, everything is available online. There a few people who can hack into your systems and fetch the important and very sensitive and confidential data which then they use to make the theft. So, they will use your name, number, credit cards, aadahar card number and take a credit. Or the may make many multiple online transactions using this. Not only the hackers can do that, but if by mistake you have shared your confidential information somewhere, and it was meant to be destroyd but was not destroyed by any of the reason, some very over smart individual, will steal your identity and make the use of it.

What happens in such cases? When any of this occurs, it becomes an identity theft where the credit transaction is done from your account but not by you. You come to know about it when either you check your credit report in detail by yourself or if you have applied for a credit and it got rejected due to this reason. Let us now see, how can identity theft affect the credit score.

  1. Sudden dip in score

If in the month of May you checked your free cibil score, and it was 783. now just as an example mentioned above, you applied for some loan and it got rejected. Now when you investigate, you came to know that your score is 620. There is the sudden dip of 163 points in your score. While seeing the report minutely, you come to know that there are many transactions which are not made by you and a few credits which you have not applied for! Terror number one.

  1. Rejections in loans or credit cards.

As there is a sudden dip in the score, the credits or the loans you must have applied for, which are in pipeline will get rejected.

  1. Longer run effects

The negative flags, stay on your report for much longer time. Nearly a decade. Now, since you have not made payment by yourself, why would you pay the same? Makes sense, so in those cases, you would need to raise the dispute so that it can get off your report in the meanwhile.

  1. Fear always

Since once this has happened, you will always be scared to share your confidential information even to those whom you would actually have to share in case of taking credits or any important things.

Always make sure while applying for credit cards or any loans, do not share each and every detail with everyone. Also, whenever you share the important documents write the propose of in on the photo copied document in order to not get it stolen. While sending these details, be cautious. If possible send it in encrypted form or try not sending it online. Stay alert and stay accurate & updated. Do not neglect thing which can affect your score!

Is My Income Part Of My Credit Report?

There are a lot of people who do not know what a credit score is and how it is calculated. Many of us only come to know about a credit score after a loan or a financial product gets rejected. After getting such news you try to get your credit report to understand where you went wrong and start making attempts to build up your credit score. While building a score from scratch, you will try finding easy ways to get the score up in no time to avail a financial product. You make all your payments on time, use less limit on your credit card but you do not find a significant impact on your report. Suddenly something clicks in your mind, can my salary be a part of my credit report?

The answer to this question is a NO! Your salary or any type of monetary gains can never be a part of your cibil report. Other than income, factors like, color, race, religion, marital status, gender, occupation, where you live, etc. do not contribute to your credit score.

There are a lot of factors which contribute to your cibil score but salary is not one of them. Factors like your payment history contributes 35% to your score, the amount owed will be 30%; length of credit history contributes 15%, 10% of new credit and 10% on types of credits used.

A credit report is designed to analyze your financial behaviors and if you can default a new line of credit. It makes the lender’s job easy to understand if you are credit worthy and if they can provide you a loan or a financial product. The lender will definitely check your incomes and gains to understand your repayment capability but it will also check your credit report for any past defaults.

One of the reasons why your salary is not listed on the report is because the credit bureaus seek information from lenders, creditors and collection agencies; they do not take any self-provided data from consumers as they may have fake information. The employers also are not comfortable sharing the packages to bureaus as this kind of information is confidential. There can be instances, the competitor company can pull any employee’s records of how much package are you offering and can headhunt your candidate, as credit report information is easily available these days.

How can you bank on your income?   

You can use your income to do a lot of things financially. You can invest in insurances, which is termed to be good investment. The payments you make for your insurance policies are reflected on your report which than helps you improve cibil score.

There are instances, when you need urgent funds and you cannot rely on your family members. You can show your stable income proofs to the bank or any lender for a quick loan which can help you with quick funds. When lenders make decision on giving you a line of credit, your salary is always a key factor while considering your credit worthiness.

Once you have availed a loan, make sure to make timely payments to the bank, so that your credit score up rises from time to time and when the time comes, you avail a bigger loan like a home loan or a luxury car loan with ease.

The other ways to bank on your salary in financial market is to apply for credit cards. Credit cards play an important role in everyone’s life if used properly. A credit card can be a boon at emergency times and can be a source to quick funds. If you have a good income structure, you can apply for a credit card with good upper limit. Card lenders consider your salary and gains when they accept application to determine if you are a car worthy individual and also what would be your credit limit. Owning a credit card can help you many ways including improving your credit score.

If you are on the way to build a good credit score, don’t feel bad if your salary is not considered as a component to calculate your cibil score. You can use other ways to build a good score, where your salary can play an indirect role. Just utilize your salary wisely and make all your payments on time, you will see a great hike on your cibil score in no time.

Age Of Free Credit Score: True?

From January 2017, the Reserve Bank of India made it mandatory for all credit rating agencies to provide a credit report without any cost once a year when a request is made. This means the agencies have no obligation to provide a report themselves, thus if you need a report then you have to expressly make a request as per the guidelines laid down by the agency to get it. Well, does this guideline by the RBI actually translate into free credit score for all those who require?

How to Get Your Free Credit Score?

There are four credit agencies that provide credit reports for individuals in India and each has a different process for getting a credit report. Let us have a look how you can access your free credit score from each one of them:

  • Transunion CIBIL: If you want to get your free score from CIBIL you can do so by visiting the website where there is a link at the bottom of the home page for getting a free report. It’s a three step process, the applicant needs to fill a form where basic details need to be filled and then answer a few additional questions for authentication purpose. Post the details being verified the applicant can access his/her report.
  • Crif High Mark: They also have a link for getting the free score; it is on the left side bar of the home page. The first step is to fill in basic information, here the information required is more detailed, after filling the form the applicant chooses his/her order, then they authenticate themselves, after which they can download their report.
  • Equifax: If you follow the link that is displayed for getting a full free credit report you are directed to a set of guidelines where you are instructed to download an app for the same. The applicant will need to login to the app using a temporary PIN, authenticate themselves and login again after 24 hours. You are given four attempts to answer three questions related to your credit history; once you have completed all steps successfully you get the report on your phone. Those who do not have smart phones can get the report by sending a scanned copy of an identity proof and address proof along with the application form at the mentioned email id.
  • Experian: There is no separate link for a free credit report but once you click on the link for getting a report, it takes you to a form where you fill in details as required, get an OTP and then generate a password. After this, you can almost immediately access your report.

So is it Really the Age of Free Credit?

Yes, it is the age of free credit. Each organization has a different process, for some, it is slightly cumbersome and for others, it may be simple and quick. Irrespective of that fact, all rating agencies do provide a free credit report almost immediately or after some delay. If the process is followed the applicant can access their reports if they wish to do so.

Since there are four rating agencies, effectively one can get four credit reports in a year which makes one report each quarter. In case someone wants more reports than that (which is unlikely) then the option of getting it free might not be there.

So what does it mean for you?

Being updated about your credit health has many benefits. It allows you to spot any errors in the report and get them rectified if required, you can improve CIBIL Score by assessing the reason for it being low, and looking at report can also help you detect signs of any identity theft if it happens. Checking your report has many positives, now it costs nothing and it also does not lower your score.

So it’s up to all of you out there to make the best of the situation and stay credit healthy by checking your credit score regularly and that too without paying anything!

 

How Important Is One’s Credit Score?

Indian loan market has seen a rapid growth in recent years. Gone are the days, when people used to take loans only in times of financial crisis. Declining interest rates and flexibility to repay have made loans an attractive option to fulfil one’s needs today and repay the amount in equal monthly instalments. With this trend, credit scores and credit reports have also gained importance. People are waking up to the fact that scores affect many aspects of their financial life. So many people who have a low CIBIL score are now taking steps to improve and maintain it. They check their free credit score from all the three credit bureaus to keep track of their credit health. But is CIBIL score only a matter of concern to people looking for loan approvals. No, the importance of score goes much beyond that. But before we delve into that lets understand what a credit score is.

Three credit bureaus in India CIBIL, Equifax and Experian compile financial data shared by the member banks and other lending institutes relating to the credit taken by each individual. These bureaus prepare a credit report for each individual, which basically reflects your credit card and other loans repayment history. Based on your credit card usage and repayment track record the bureaus calculate a credit score. The way your marks had determined your level of knowledge in school, in the same way, the credit score determines the risk factor associated with a borrower.

Here are some places where your credit score will be evaluated

Loan approvals- Checking your credit score is one of the first things that lenders do to evaluate whether you are worthy of giving a loan. A high score helps in gaining lender’s trust and assures you of easy approvals. A low CIBIL score indicates that you haven’t dealt with your past debt obligations responsibly, hence lenders feel wary of lending you money. Even credit card approvals and credit limits get affected by your score. Hence a good score comes in handy in obtaining any kind of financial assistance.

Interest rate- An excellent CIBIL score not only helps in getting loan approvals, it also helps in bargaining for a better rate of interest. Lenders are ready to cut down on interest rates if the past records show that you are a diligent and responsible borrower. A low score costs you a lot, as banks charge a high interest rate to cover the risk that they are taking by lending you money. Hence your monthly interest outgo is directly impacted by your credit score.

Employment- Unheard of a few years ago, it is now increasingly becoming a common practice to check the CIBIL score of prospective employees. Credit checks are now an integral part of the hiring process  for jobs in the finance sector, or positions which require a person to handle company’s money. It is basically done to ascertain whether you are responsible in handling money. So if you are looking for a job, check your free credit score to see that your credit profile is in good shape.

Insurance premiums- Whether you are buying a home insurance or a car insurance your score will play an important role in determining the insurance premium that you pay on it. A low score can cost you thousands of rupees more than someone who has an excellent rating.

Renting property- Your CIBIL score can influence the rental opportunities that you have, as many landlords too check your score before letting you out their property. A landlord may not want to take the risk of not getting paid by renting his property to a person with a low CIBIL score. They want to be sure that they get their rent on time, so they prefer renting to a person with good credit who has shown responsible behaviour in the past.

You can order your free credit score from any of the bureaus once every year to monitor your credit situation. An excellent credit rating is anything higher than 750, but even if your score is between the range of 700-750, you can easily qualify for loans and bargain for low interest rates. A score less than 600 is considered as a low CIBIL score. If you fall into this category don’t lose heart. You can still get your financial life back on track if you take conscious efforts and work towards improving CIBIL score.

What Do the Credit Score Numbers Mean?

A credit score plays an important role when it comes to opting for a loan or a line of credit like a credit card. Credit scores are used by lenders and various Non-banking financial services to evaluate your capability to avail a loan and make decision whether they can offer you a credit. The score is a result of your payment patterns, any default payments, any past settlements and many more.

There are many different scores which are available in the market for the lenders like Experian, Equifax and so on but Indian banks and non-banking financial services companies prefer CIBIL as their lead bureau for credit scores. Credit Information Bureau India Limited also known as CIBIL was founded in year 2000. It helps providing credit information to Indian banks to filter loan applications.

There are different categories of cibil score which helps boost your loan application and also gives you added benefits while availing a loan. The score ranges from 300 to 850, each financial transaction either contributes or downturn your cibil score.

Today we will sight the score breakdown and help you to understand what the credit score mean,

Score 0-349

If your credit score is between 0-349 this means you have no lending record. Many of us think to make our purchases on cash and do not take loan for any purpose but a no cibil score is equivalent to a bad cibil score. Always try getting small consumer loans from time to time and make regular payments on the same to see a great hike on your score. This will help you get started with the process and in future if you need a bigger loan like a home loan or a personal loan you will be able to avail a loan with ease.

Score 350-650

If you are in this category of credit score, most probably you have made a lot of financial mistakes like not paying your dues on time also if there is a settlement in your account. This will definitely hamper your chances of getting a loan in future. If you have not made a payment on time the transaction remains in your report for at least 5 years. A low cibil score will always pull you backwards from financial harmony, if you need help with repairing your credit, you can always approach a financial professional.

Score 650-699

This is termed to be a safe zone and you need to work hard to reach in the good score range. If you are in this category it is much likely you will get a loan but chances are you will need to pay much higher interest rates as compared to other options available in the market. Try not to default any loans further and you credit score will be up in no time.

 

 

Score 700-759

This category is called the safe category. In general terms you can easily get a loan from any lender without any hassles. This indicates that you make all your payments on time with almost no defaults and also your credit balances are low. If you are applying for a loan, you will get high priority as compared to others and you can also negotiate on the interest rates offered by the bank.

Score 760+

We can say that, very few people achieve this milestone. You can be in high demand between lenders if you fall in this range category. This credit score range means you have financial integrity and do not default your payment even by mistake. You have a long history of line of credits without a single default. They receive the best offer available in the market and also can negotiate with the lender on interest rates, processing fees and so on. It is really hard to achieve this breakthrough, but is even harder to maintain the same.

A credit score states a lot about you when it comes to financial integrity and how you manage your loan funds. It is a ladder you can use to achieve financial milestones and achieve an easy credit in desperate times, but the same factor can be the worst nightmare of your life and can haunt you for a very long time. Borrow responsibly and repay well to live in financial harmony.

4 Things which look harmless but can hurt your score

A credit score affects one’s financial life in numerous ways. We all know that missing a credit card payment or loan EMIs will damage our credit profile. But there are some things that look harmless but can have a drastic negative impact on our score. Avoid these financial decisions to avoid unexpected surprises.

Co-signing a loan – If your friend or a family member is not able to qualify for a loan, you may not find any harm in co-signing a loan in order to help him. However one needs to understand the financial implications of such a decision. Co-signing a loan has almost the same effect on your credit score as signing a loan oneself. The co-signed loan account will appear on your credit report like any other debt. By co-signing a loan you become legally responsible for paying the loan EMIs if the primary borrower fails to do so. If the primary borrower makes a late payment or misses a payment altogether then it will affect your credit profile as well. Co-signed loans are considered while calculating your debt to income ratio even if they are being paid on time. It reduces the lender’s perspective of how much you can afford to pay back and hence reduces your ability to borrow funds. So if you are planning to apply for a home loan in near future it is better to avoid co-signing for others.  If you do co-sign a loan and take a risk of its implications it is imperative that you check your credit report and score regularly. Keep track of how the co-signed loan is affecting your credit score.

 

Closing old credit card accounts – Sometimes in an effort to clean up credit reports and take control of one’s finances, people close their old credit card accounts that they no longer use. But doing so affects the score negatively. Credit utilization ratio that is a major determiner of CIBIL score is calculated by dividing the total credit card balances by the total available credit limit. Closing old credit cards, reduces your available credit limit and hence increases your utilization levels. This has a major negative impact on the credit score. Length of the credit history also affects one’s score. Old accounts help in raising the average age of your accounts that is good for the credit score. Closing them will reduce the average age of accounts and lower your score.

Paying off an old charge offs- It may be hard to believe but yes, paying off old charge offs can actually reduce your score than increase it. Charge off accounts are those that you haven’t paid and the lender no longer expects any further payments on them. Payments on these accounts will reactivate them and make them appear more current. The collection agency may report it as a new debt than a written off debt. As new accounts have a greater weightage during the credit score calculation, paying written off accounts can bring a drop in your score.  Make sure you do not do any such mistakes before applying for a home loan. Even a few points of score can affect your home loan approval process.

Pushing credit limit- We all know that credit utilization has a major impact on our credit score. That is why it is advised to keep this utilization level below 30%. But what many don’t know is that paying off the balance in full each month may not necessarily mean that you have low utilization levels. If you are in a habit of maxing out your card often you may have high utilization levels that maybe affecting your score negatively. The balance that is used to calculate the credit score is your last statement balance. So if you have charged an amount close to your limit, you will have a high credit utilization ratio. Such over dependence on credit impacts your score negatively.

People who have been diligently paying off their debt obligations can also have a low credit score if they make some of the above mistakes. If you find yourself in such a situation do not despair. You can still apply for loans for bad credit where lenders do not just go by a theoretical evaluation of score. They weigh several other factors to determine your eligibility. So if you are an otherwise responsible borrower, but your credit score took a hit because of the above reasons, you can easily get approved for loans for bad credit.