Friday, 16 January 2015

Everything You Need to Know About Credit Score

What is Credit Score?
Credit score is a composite score calculated on a scale that ranges from mid-300’s to mid-800 on the FICO scale on the basis of the credit profile of the person as describe below.

1. Your Past Payment Record: - your consistency of making payments on loans and credit cards probably determines more than 90% of your credit score. Key factors that tend to be taken into account are:
a) What is your past payment record.
b) Every missed or delayed payment may lead to a lower score.
c) Recent history (Upto 2 years) has a greater impact on your score.
d) Consistent repayment record tends to improve your score over a period of time.

2. Nature of credit availed by you:
a) Higher reliance on unsecured loans such as personal loan and credit cards may lead to negative impact on your score
b) Credit card usage in excess of about 30- 40% of credit limit tends to pull down the score, more so if this is combined with revolving credit on multiple cards

3. Hard inquiries:
a) Too much loan related inquiries in the past are seen as a sign of a person badly in need of loans. This is sometimes referred to as a “credit hungry” profile. This may impact your score negatively.

What is a good credit score?
It’s more about keeping your score healthy rather than it being good or bad. It is often found that banks tends to give loan at lower interest rates and more attractive terms to those who have a credit score of more than 675. Lower scores will tend to make your mortgage and auto loan more expensive.

Main reasons for a low credit score:
There may be many reasons for a low credit score. They are classified into two main categories:
1. Low scores due to bank error
a) Errors in credit information provided by banks to credit bureaus
b) Identity theft or identity fraud where some unauthorized person has availed credit using your profile
2. Low score due to irregular past payment behaviour
a) Missed or delayed loan payments
b) Too much loan applications made in the recent past
d) High credit card dues.
Useful tips to improve your credit score:
a) Make all your monthly payments against loans on time
b) Keep away from too many credit cards. Don’t miss credit card payments.  Even if you find it difficult to pay the entire bill, make sure you pay at least the minimum due amount.

c) Moderate use of unsecured credit lines such as credit card and personal loan