How is my Credit Score Determined?

A credit score plays an important role when you apply for a loan or any line of credit. It’s a three digit number which is used by the banks or lenders to evaluate whether or not they should sanction your loan. It is important to understand what your credit score is before applying for a loan, so that you have an upper hand in loan negotiations i.e. interest rates, processing fees etc.

Imagine you have applied for a loan and your loan gets rejected. You have been told to apply for a loan after you build a good credit score. Many questions will cross your mind like, what is my credit score?  How to check cibil score? How do I improve it? Now this is the tricky part! A credit score is a compilation of a lot of factors associated with your financial things.

Today we will set sight on how a credit score is determined,

Payment History

The most important factor which contributes to your cibil score is your payment history. It accounts for 35% of your score. It is a compilation of factors like : your account information, any default payments, how long the default payments are carried forward, if you have filed for any bankruptcy in the past, etc. If you would like to see a good hike on your cibil score, you should make regular payments to the lenders and make sure you do not have any default payments.

Your balance payments

The credit bureaus have each and every financial detail of yours. They monitor your financial activities on regular basis. Your credit score also gets influenced by the amounts owed by you to the banks or lenders. For example, you have a credit card and its limit is around 1 lakh rupees, imagine you have spent a fortune on the same and when the due date arrived, you converted a lot of transactions into EMIs. This way you have blocked your limit at the same time you owe a lot of money to the bank and the same is reported to the bureaus. It contributes a whopping 30% to your cibil score! It’s better to spend less rather than spending more and facing financial instabilities

Length of Credit

Building a good cibil score is a lengthy process and you need to start somewhere or the other. Once you have applied for a loan or any other financial product like a credit card your transactions start getting recorded with the bureaus. Various accounts have different accountability to your score. For example, if you applied for a home loan, the loan account will be active for at least 15 years. On the other hand a car loan lasts maximum for 5 years. Let’s take a credit card for example. It does not have an account expiry date and you can use the same, until the time you don’t want to close it. It contributes 15% to your credit score. In any case, do not close your credit card account, as that will influence your score under payment history section.

Number of inquiries

We understand there are a lot of financial products available in the market. Some of them so mouthwatering, you would definitely like to get it. Did you happen to know, for each financial product inquiry; your cibil score is being checked? The more inquiry you make with the bureau, the more your chances are to get your cibil score down. As there are a lot of products in the market, only go for the product which is tailored to your need and try making fewer inquiries with the credit bureaus.

Types of Credit Used

There are various credit accounts with which you can be associated with. The cibil score is also determined with the types of credit accounts you hold like, loan accounts, credit cards, etc.

This is just tip of the iceberg as far as credit score goes. It is important to know all these factors and how they contribute to your cibil score. But what’s more important is how you are managing your finances. The more you are financially responsible, the more you have chances of getting a loan without any hassles.

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3 Credit Myths that can destroy your score

Credit history affects various financial aspects of our life. It is crucial to understand what credit score and reports are, how the score is determined and how one can maintain a good score. There is a lot of information available to guide you to towards a perfect credit score. But do not believe everything that you hear. There are many credit myths that are also doing the rounds. One wrong step can lead you in a wrong direction. Do not get misled by such myths that can actually tank your score.

 

Here are some misconceptions that can harm your credit score. Beware of them and get to know the real facts.

 

Myth 1 : Closing credit cards will improve credit score

 

Some people believe that having a number of credit cards has a negative effect on the credit score. They believe that closing some old unused credit cards will help in raising the score. But this isn’t the way credit score works. One of the major factors that determine your score is the credit utilization ratio. It is the amount of credit you use compared to the total available credit limit. For a good CIBIL score you should have high credit limits and you should use not more than 30% of it. Closing credit cards will reduce your total available credit limit and increase your utilization ratio. This will drastically reduce your score. Closing old credit cards also affects the “length of your credit history” factor that impacts  one’s credit score. It reduces the average age of accounts and hence brings down the score. So if you really need to close some cards, close the newer ones. Another option is to close cards with a lower credit limit. Do a CIBIL score check to ensure that the impact of closing the account isn’t too drastic. Also, note that some credit card companies cancel the card if it is inactive for a long period. So charge small expenses to keep the card active.

 

Another misconception regarding closing credit cards is that if you close a card with a bad credit history, the information gets erased from the credit report and your credit score improves. The reality is that you cannot erase  credit card’s history recorded by the bureaus in your credit report just by closing the credit card.

 

Myth 2: Not using credit cards is good for CIBIL score

 

You will see many tips on improving CIBIL score that advises people to pay off all their outstanding balances and stop using their credit cards. They proclaim that going on all cash basis and staying out of debt will help improve your score. But infact such a decision can be destructive for your score. In order to have a good CIBIL score, one needs to show how well one is capable of managing revolving accounts. For this one needs to keep the credit cards active by charging expenses and then paying them off every month. Even if you have a mortgage or any other instalment loan where you are making payments diligently you will not have that perfect score if you do not use credit cards. That’s because the CIBIL score calculation also takes into account the credit mix. A person who displays responsible behaviour in using both types of accounts will have a better score.

 

Myth 3 : You need to carry a balance on the credit card to raise your score

Using the credit card is necessary to build the credit score, but carrying a balance is not. You can work towards a good score if you pay off the entire amount when the bill arrives. By carrying a balance you will have to pay a high interest rate on the outstanding amount. This isn’t required at all to show that you can handle credit responsibly. In fact, paying off the entire bill amount will help in keeping the utilization levels low which is good for your score.

 

Hope this article cleared up the mystery that surrounds the CIBIL score. You will now have a better understanding of how the CIBIL score calculation works, and what you should and should not do to ensure a good score. But what if your score already took a hit because of these myths that you carried in your mind for long? Not to worry! If you are in need of funds you can avail for loans for low CIBIL score offered by many private lenders in the market.

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.

What is the Lowest Credit Score One Can Get?

Credit scores have caused a lot of anxiety in recent time. Whether you wish to apply for a credit card, take a loan to buy a car or house or refinance your existing loan; a minimum credit score criteria is a major hurdle that needs to be crossed. Lenders base their approval decisions on the score that you have attained. That is why people are consciously making efforts to increase their CIBIL score.

If you haven’t been paying attention to your score you may be wondering what could be the worst case scenario with your credit profile. What is the lowest credit score that you can get? While a credit score range depends on the credit scoring model that a specific bureau uses to calculate the score, in most cases this number lies between 300 and 850. So theoretically your score can go as low as 300, though it happens rarely.

There are several situations that may cause the score to sink to the bottom. Items like bankruptcy, judgements and tax liens on your credit report are some major causes. Apart from these, information regarding overutilization of credit, late payments, missed payments, and accounts that go into collections also find their way to the credit report and cause your score to plummet. A credit history with a combination of these causes will result in a rock bottom score.

So if the credit score is above the 300 mark, does that mean that you can sit back and relax? Not at all! A score between the range of 300-550 isn’t considered a very good score by the lenders. Each lender has his own threshold mark based on the amount of risk that he is willing to take. You will find it hard to qualify for loans with leading financial institutions if your score is below the 600 mark. So if the score fails to satisfy the minimum threshold limit for most lenders, then you will need to resort to bad credit personal loans. These loans are given at a very high rate of interest to cover the high risk financial behaviour of the borrower.

Can you do something to increase your score? The good news is “yes”. A credit score is a snapshot of your past credit behaviour. If you start doing positive things that are good for the score, it will start showing improvement in a few months time. To begin with, you can get a secured credit card. Here you will be required to deposit an amount that serves as your credit limit. Since the issuers do not check the credit score, this card is easy to obtain even with a low score. Use the card for small expenses every month and make timely payments. You can also take a bad credit personal loan and start making timely payments to build positive history. As new positive information gets recorded on the credit report the effect of old negative information starts diminishing.

People with an excellent credit score have a long history of on time payments and low balances on their credit card. Since they are at the least risk of defaulting such people can easily qualify for loans at low rate of interest. Even if your credit profile is in a very bad shape you too can aim to achieve a high score, by practising good credit management. Here are some good financial habits that you should follow.

  1. Analyse your report to see where you stand and identify actions that are bringing your score down.
  2. Pay your bills before the due date
  3. Do not use more than 30% of the available credit limit on your credit cards.
  4. Avoid opening unnecessary credit card accounts
  5. Do not close old credit card accounts
  6. Maintain a good mix of revolving and instalment credit.
  7. Check your credit report for errors and dispute if you find any discrepancies.

When you are on your journey of rebuilding credit make sure no new negative items enter your credit report. As new positive information gets recorded in the report you will be able to put all your past problems behind and hope for a bright future ahead.

Advantages of a second credit card in hand

When people apply for their first credit card the motive is most likely to have ease of shopping (without the need to carry cash) and build a good credit history. But the second time around the objective of getting a credit card changes to a great extent. While choosing the second card people look at rewards and benefits and a higher credit limit.

If it’s been a year since you had your first card, and if you have been using your card responsibly by paying bills on time and in full each month; it may be time to reap the benefits of a second credit card. But if you are in the habit of maxing out your card, or are already struggling with a huge outstanding balance on your first card, or if you are prone to spending beyond your means then applying for a second card may not be a good idea.

Here are some advantages of having a second credit card

Backup option- Imagine what would happen if your card is lost or stolen! If you want to avoid the hassles of using cash for all your purchases till you are able to resolve the situation then get a second credit card soon. Keep it in a place different from the first card so that it is available when you lose your first card. There may also be times when the store person tells that your card isn’t getting accepted due to technical issues. A back up card always comes in handy when your first card is not available or gets declined.

Rewards- Different credit cards come with different kinds of benefits. Some credit cards offer amazing discounts on dining, some give cash backs on groceries, while some give reward points on online shopping that can be redeemed on other purchases. Travel cards are the best bet if you often buy air tickets. So if your expenditure pattern is tilted towards an area where a card offers special benefits, then having such a card to cover for those specific expenses makes sense. That is why people often choose a second card to take advantage of specific reward schemes on the expenses that they make often.

Improve CIBIL rating-Getting a second credit card often works well for people who are looking at improving their CIBIL rating. Here is how a new card affects your CIBIL score. An important component that affects the calculation of Credit score is the credit utilization ratio. This ratio is calculated by dividing the total debt balance outstanding on all the cards with the total credit limit on all cards that a person owns. Getting a new credit card increases your total available credit limit and therefore reduces the credit utilization ratio. An important point to note here is that this strategy helps in raising the CIBIL rating only when the balance outstanding is not allowed to increase. If the credit card holder uses the second card for small expenses and pays back the amount in full each month, it will bolster the CIBIL rating. However if the new card is seen as an opportunity to spend more and take on more debt, then the increase in debt pile may increase the utilization rate and lower the CIBIL rating.

Deal with emergencies– Having 2 credit cards raises your credit limit. Though you may not use your card upto the limit to ensure that you get a good CIBIL rating, having an option gives you peace of mind that you have something to fall back on in case of emergencies. When a sudden medical situation arises where the credit limit on the first card isn’t enough to make payments, then the second card serves as a saviour.

Some key points to remember when you get your second card

Use the card for small expenses and pay it back in full each month to display responsible credit behaviour and improve CIBIL rating. An inactive card will do no good to your score.

Do not use more than 30% of available credit limit on any of your credit cards.

You now have 2 payment due dates to track. Do not forget to make timely payments, as it is the most important factor that affects your CIBIL rating.

A second credit card raises your purchasing power, offers you several benefits along with an opportunity to improve your credit profile. But keep your spending in check and use the card wisely so that it works in your favour.

 

Does winning a Lottery affect My Credit Score

Winning a lottery is like a dream come true. If you are one of those lucky few who have won lakhs or crores of rupees in a lottery, you may be wondering its impact on your life. Well, just having the money will not put an end to all your financial woes. How you put it to use is what determines its effect on your financial life. Does winning a lottery affect your CIBIL rating in any way? Let’s find out.

Correlation between credit score and wealth

The income level of an individual or his bank balance has no effect on his credit score. People with a high net worth may not necessarily have a high credit score. The credit score calculation primarily factors in one’s payment history and credit card usage behaviour. So even if a person has a huge bank balance, he will not have a good CIBIL rating unless he makes timely payment of his loan EMIs and credit card bills.

The wealth of an individual may be taken into account when a person seeks approval of a loan application. Banks do check an individual’s bank balance and income level apart from the credit score to determine whether the person has the capacity to repay the loan. Hence winning a lottery may increase your ability to seek loan approvals.

Here is how you can use the money to improve CIBIL score

Though winning a lottery does not have a direct impact on your CIBIL rating, it does give you an opportunity to raise your score by other means. Here is what you can do with the money to improve CIBIL score.

  1. Pay back outstanding dues

If you were unable to clear your outstanding dues in the past because of lack of funds, you would surely have a bad credit history. Late payments, collections, charge offs and other such negative remarks brings down one’s CIBIL rating. Now is the time to put your money to good use. Contact the bank and discuss that you have sufficient money to repay them. Request them to remove your name from the bank’s loan defaulter’s list. Negotiate with them if they can remove negative remarks from the credit report if you clear all past debts.

  1. Reduce credit utilization ratio

Credit utilization ratio plays an important role in CIBIL score calculation. A high utilization shows an over dependence on credit and reduces your credit score. By using the funds to pay off your credit card outstanding balances you can reduce this utilization ratio and work towards improving your credit score. Make sure you do not use more than 30% of your available credit limit. Keeping low utilization levels helps boost CIBIL rating.

  1. Exhibit good credit behaviour

Since you have sufficient money in your bank account, make sure you pay all your bills and EMIs on time. By exhibiting responsible behaviour and making on time payments one can build positive credit history.

What is the Meaning behind Your Credit Score Range?

There is sense of comfort and satisfaction when you know that your credit score falls within the top range. However, what’s the top range exactly? How does it affect your creditworthiness?

A lot of people are unaware of the different types of credit score ranges and how they affect your credit profile.

Taking the CIBIL score range as an example for this post, we will take a look at the different ranges that fall within its entire spectrum.

CIBIL Score Groups

CIBIL scores on a scale of 300 and 900. So, a score of 300 will be the lowest, and 900 the highest. This range is divided into small groups:

750-900

If your score is above 750 then you won’t have any trouble in securing a personal loan, home loan, etc. with a bank of your choice. You can also easily get attractive interest rates with a score in this group.

Most of the people whose scores fall this in this category have three common habits:

  • They always pay their credit card bills and EMIs on time.
  • They have multiple credit cards but their credit utilization is low. So, if their credit card limit is Rs. 5 lakhs, they will use less than Rs. 1 lakh of the same.
  • They don’t close their oldest bank accounts and try not to open new ones

600-749

If your score falls under this range, then you can consider your score “good” but not excellent. What it means is that you are a responsible credit user and know how to manage your money. You try to pay your bills on time but may occasionally be late for a payment or two.

500-600

Any score between 500-600 is a fair score. So, although it’s not a low CIBIL score, it’s not good either. From the perspective of your creditworthiness, you shouldn’t be happy with a score in this group.

Although you can apply for a loan with a “fair” score, it’s not recommended. This is because there is still a good chance of facing rejection. If you apply for a loan multiple times in a short period, then it can actually damage your score further. So, what you should ideally do is work on the score first. Once you have moved from a “fair” score to at least “good”, you can apply for the loan. Not only now you will be able to easily secure it, you can also try to get lower interest rates and more comfortable terms and conditions.

Below 500

A CIBIL score below 500 is considered a low CIBIL score, or rather a “poor” CIBIL score. As you can expect, this means that you will only have problems such as:

  • Obtaining any kind of loan itself can become extremely challenging. Even if you are able to convince a lender to overlook the score, you will have to pay a high interest rate that will make the proposition not worth it.
  • As many finance companies have started screening the job applications on the basis of the credit score as one factor among many, you can have a tough time securing a job too.
  • A poor score means that you will be under high stress and financial insecurity.

0 Credit Score

If your credit report shows “0” credit score, then it’s natural to be worried. However, there is no reason for that because, in most credit reports “0” doesn’t signify the lowest score, but rather than the lack of credit history. In other words- if you have never taken credit in any form, such as credit cards, loans, etc. in your life, it means there is no credit information available, and hence no credit score yet. Once you are under any kind of debt, your lender will submit the information to the credit rating agency and your credit report will be created.

Meaning of Credit Score Range

By matching your credit score with the different groups given above you can easily self-assess your creditworthiness. If your score is poor or even just “fair”, it’s best if you can take it up a notch. This is because your credit report is extremely important, and you should try to keep it in a good condition.

How to Decode One’s Credit Score

The credit score of an individual is increasingly gaining importance in the financial world. It is a measure of the person’s past ability to make timely repayments and effectively manage credit. It is necessary to maintain a strong credit history if one wishes to secure loans. Despite being such an important measure, many people have several confusions with regard to this number. Let us decode what this score is. Here you will find all you need to know about this three digit magical number.

Why is credit score so important?

Even though numerous banks and financial institutions as well as private lenders offer loans for various purposes, it is not so easy to secure loans. The CIBIL score is used by most lending institutions to assess the credit health of an individual before granting credit. Lenders want to be sure of the repayment capacity as well as the intention of the borrower before disbursing the funds. A good CIBIL score is an indicator of good financial health and responsible credit behaviour. While a bad score indicates that the person may default in future. Hence having a good CIBIL score provides easy access to loans. The rate of interest also factors in the borrower’s credit score. A low score increases the risk exposure of the lenders, who then charge a high rate of interest to cover for that risk.

It is also beneficial to have a good CIBIL score when you are applying to jobs in banking and finance sectors. That is because employers feel that a financially disciplined employee will work diligently as well. Hence you may be asked to submit your credit report or score when you apply for jobs. Some insurance companies take your credit score into account while setting the premium. Many landlords too check your score to see whether you have a stable financial history.

What determines your credit score?

The information recorded in your credit report goes on to determine what your score will be. There are 5 main influencers that compose the score. Past repayment track record is the most crucial component among them that accounts for 35% of the score. The utilization ratio on credit cards, average age of accounts, mix of credit and the number of hard enquiries that are made when you apply for new credit are the other factors that contribute to the score. Factors like your age, nationality, marital status, location of address, salary, employment history do not affect the credit score in any way.

Making the EMI payments and credit card bill payments on time greatly helps to improve CIBIL score. Keeping the credit utilization percentage low(that is the balance outstanding on the credit cards as a percentage of the total credit limit sanctioned to you), having a healthy mix of both secured and unsecured credit lines, and applying for new credit sparingly are other ways in which one can improve CIBIL score.

What score is a good score?

A CIBIL score between 750 to 900 will put you in an advantageous position. It is a clear indicator that you have a sound financial condition and you have handled all your past obligations responsibly. Since your chances of default are almost nil in this case, banks will readily offer loans at reasonable interest rates. You can shop around and demand the best rates possible. A score less than 600 puts you in the category of a subprime borrower. It may result in an outright rejection of your loan application. An average score between 600 and 750 gives you limited options. You will be required to pay a premium on interest rates in order to secure an approval. But if you work to improve CIBIL score, and start making timely payments you can surely see your score rising in few months time.

How should I keep track of my credit score?

You can order for your score from any one of the three credit bureaus online. As a practice, check your CIBIL score once every year. If you plan to apply for a new loan in the near future, then check your score at least 6 months prior, to ensure that it is good enough to secure an approval. If your score is low, you will have sufficient time to work on it and improve CIBIL score.

3 Ways Parents Could Accidentally Harm Their Child’s Credit

Credit health is as important as your mental or physical health. However many a times we realize the significance of credit health only when it is hurt. A low credit score hurts your credit worth and makes you ineligible to advance the loans.

Let’s find out some of the common mistakes which hurt the score in the beginning of credit building cycle of an individual. Herein we would focus on 3 ways parents accidentally harm their children’s credit report.

  1. Multiple Student Loans
    The escalating costs of school and college fee is one of the major reasons why student loans are as much a fad as a necessity for young aspirants. The parents who fail to incur adequate research on the matter and avail a high cost loan for the purpose, certainly build a huge financial burden right in the beginning of their child’s credit life cycle.

    Many people mindlessly raise multiple loans for students owing to availability of credit facility at lower rate. With enormous amount of debt it would be a huge responsibility for a student to repay a loan after completing their education. As a parent, it is your duty to calculate total fee amount and try to look for the least expensive way to finance your child’s education.

    You also need to build the healthy habit of saving funds in your child. As a parent, it boils down on you to inculcate good financial habits in your child. Raising too much of loan for their education would not be a smart decision if it results in low CIBIL score.

  2. Share your credit cards
    Excessive spending is another key reason for impending balance on credit cards. Before handing over a credit card to a young mind, it is important to help them understand the importance of not having huge balance at the end of every month.

    Being a parent you can also add the kid as your credit card account holder. It will sometimes help them to improve their CIBIL score. But maintaining good credit behaviour would be a must. As an adult you need to ensure that regular payments are processed on time and there is no balance after the due date. Remember your child is most likely to follow your footsteps. If you are not serious about repaying your bills on time, the child is also not likely to pay attention to deadlines. You would seriously challenge your child’s future with bad credit habits.

  3. Credit education
    If you fail to teach right knowledge about finances and credit to your child it is your failure as a parent. You need to make the young mind understand the important aspects related to money management and ways to improve CIBIL score. The first credit lesson starts from home. You need to make the child understand how credit affects their life. You need to make them understand the importance of credit for their education, job to buying a home or car.

You need to teach them how important it is to monitor their credit score multiple times in a year. It is important to let them know how information in their credit report will impact their credit score.

Educate them about the available resources to obtain a free annual report. You can choose to review it along with them so that they learn the intricacies of maintaining a good score. You need to help your child develop a mindset that it is easier to maintain credit health rather than fixing bad history later on.

Last but not the least, do not forget to talk about identity theft threats. For online it is one of the fastest-growing crimes. They should know that sensitive information related to account should not be shared with anyone outside.

The Bad Stuff Is Off My Credit Reports – So Why Didn’t My Scores Go Up?

Your credit report and score is a reflection of how responsibly you are handling your debts. If you are looking to finance a new car or home or just looking for better terms on a credit card, you will be evaluated against the yardstick of your credit profile. If your past spending habits and irresponsibility towards your debts have blemished your credit report, then it may become difficult for you to avail new loans.

At this juncture you may think of ways to improve credit score. Getting negative items removed from your report seems one obvious way to increase your score. You may ask for a goodwill adjustment or pay for deletion of entry from your report. Once this bad stuff falls off your report, you should see improvement in your score. But things aren’t so straightforward. Whether your credit score will improve accordingly or not will depend on several factors like the type of negative records (whether they are late payments, collection accounts, charge-offs, bankruptcy), age of these accounts and other information recorded in your report.

It Takes Time to update the credit records

Even if you have asked the creditor to remove the entry, it takes time to flow through the system. A company may take up to 30 days to send the updated information to the credit bureau. Only when the report is updated with new information will you see a change in your credit score. You need to make sure that the updation is done in all the three bureaus. If one particular bureau doesn’t receive the updated info, then you will not see any change in the score from that bureau.

Time of deletion

When a late payment, or a serious negative item like a bankruptcy or a foreclosure appears on your report your score drops significantly. But as time passes the impact of these items on the score starts decreasing. Your recent credit behaviour of on time payments can overshadow your past mistakes to a great extent. Though the older negative items continue to have an effect, it is only in small measure.

So if an old negative account is removed from the report it is unlikely that it will have a lot of positive impact on the credit score. As against this, if a recent collections account drops off the report then it will bring a big boost to your cibil score.

Another point to note is that simply paying off a collections account doesn’t bring any change in your score, it only marks it as paid. As logic suggests if an unpaid account is bringing your score down, paying it off should have a reverse effect of increasing your score. But it doesn’t work like that in credit scores. The fact that a collections record was present on your report is enough to bring your score down, whether it is paid or unpaid. Hence only when you request the lender to delete the entry once you pay, can you see a change in your score. Keep track of whether the collection agency removed the entry after receiving the payment or not.

Different scorecards

Different individuals are rated based on different scorecards. Based on the information in the credit report an individual accumulates points which determine his credit score. The type of scorecard used for an individual depends on the length of the credit history, number of credit accounts, presence or absence of negative records and many other factors. As the credit history changes with time so does the score card used for evaluation. A removal of negative information may result in a switching from one type of scorecard to another. The new credit score is based on different set of factors and the points gained on those factors may not necessarily show an increase from the previous score.

One needs to remember that credit score changes do not happen overnight. A lot depends on how you dealt with the negative account, timing of removal and how much the negative record was affecting the score in the first place. One should at least wait for 30-60 days, to see an improvement in the score once the bad stuff was removed from the report.

It is unlikely that you can get rid of all negative records on your report. If that was the case, everybody would have an excellent credit score. The lenders by law are required to report accurate information. So it is better to work on your financial habits, so that you don’t make credit mistakes in the first place. Take on a liability only if you are sure of repaying it as per the set timelines. Be responsible for timely payments of credit card bills and EMIs. Such good credit habits will always ensure an increase credit score.