Credit report is a significant tool to access your financial standing, featuring important details regarding your loan accounts, payment history and credit utilization ratio. On the basis of these factors, credit bureaus generate your credit scores. When applying for any new loan or credit card, your credit report and credit score are the very first thing that the lenders check to determine your eligibility and creditworthiness. These factors show how responsible you are towards the finances. On the other hand, negative marks such as default payment, bankruptcy and collection accounts could put you in a risk category and most lenders would avoid sanctioning you the loan and credit.
Therefore, it is of utmost significance to keep an eye on the credit health on regular basis and at the same time, it is also important to gain an understanding about the components of credit report.
Payment history – Your payment history is the main component contribution about 35% of your credit score. When the potential lenders check your credit report, they are most concerned to learn about your payment history rather than any other factor. It is the best way for the lenders to determine your financial behavior towards the loan accounts. This section of your credit report includes both revolving credit such as credit cards and line of credit, and installment loan accounts such as personal loan, car loan, home loan, etc.
As it is a major contributor of credit scores, it’s always significant to keep the EMI payments regular. Otherwise even a single default payment could hit the scores drastically and the same would remain on the credit report for at least up to 3 years, subject to what efforts you make to bring the scores back in good range.
Outstanding dues – How much you owe is another major factor to determine your financial health by contribution for 30% of your credit scores. Basically, it is the ratio of your total credit utilization to the overall credit limit available to you. Say for example, you have a credit card with Rs.50000 limit and have a car loan worth Rs.7 lakhs. You have utilized Rs. 28,000 from your credit card and have outstanding car loan of Rs.2,50,000, then the total amount owed will be Rs.2,78,000.
Just like the payment history, you’re total outstanding dues also play a significant role in determining your creditworthiness. Most lenders would avoid sanctioning a new loan or credit card to a person who is already debt ridden. Lenders would consider such applicants highly risky as a huge portion of their monthly is already going towards loan payments and it would be difficult for them to manage another line of credit. Such applicants are at high risk of defaulting payments and therefore, experts suggest keeping the credit utilization below 30% of your available limit.
Length of credit age – Potential lenders are keener to learn how experienced you’re with handling of finances. Higher number of years you’ve been in credit handling has a positive impact on the credit scores as most lenders avoid sanctioning loan to young borrowers. Your length of credit age makes up to 15% of the scores and this could even be a bigger factor in case you’re new to the credit world.
Therefore, at times, young borrowers usually face difficulty in getting high-value loans and credits compared to those who’re highly exposed to types of loan accounts. Hence, if you’re looking for bigger line of credit like home loan or car loan, it’s significant to first establish your credit age starting with small borrowings. This would help you get the best financial deals on a later date.
Credit mix – Most borrowers often overlook credit mix factor in a credit report. Remember, it is just another important component of credit report contribution 10% of your credit scores. You may overlook the factor, but creditors pay attention to minutest details on your report. Generally, lenders check for different kinds of loan accounts and line of credits on your credit report to see how experienced you’re with handling types of credit accounts. For instance, missing out secured loans and having higher number of unsecured debts could signal red marks and the lenders could consider you as highly risky. Hence, credit mix is a vital factor to evaluate your creditworthiness and the degree of credit risk.
Number of inquiries – There are two types of inquiries – soft and hard. Soft inquiry is pulled when you check your credit health or the potential lenders check to provide pre-approved loan and credit offers. On the other hand, hard inquiries are pulled when you apply for a new loan or credit card and lenders check your credit report to determine your creditworthiness. While soft inquiries don’t have any impact on the financial health, number of frequent hard inquiries could hit the scores badly. Higher number of hard inquiries within a short span of time could showcase you as credit hungry and accounts for 10% of your scores. However, inquiries made to get the quotes for specific loan such as car loan or personal loan within a period of 30 days is counted as single inquiry.