You must have heard the term “knowledge is wealth”. This article would give you all the information that you might have not been aware about the credit score.
A credit score helps determine your loan amount, interest and tenure. So better the credit score better the loan terms. So, let us see look at some of the things that is not widely known about your credit score.
1. The Big 5
No don’t confuse it with the Big 4 of accounting firms, this are the five factors that go into your credit score. Read on to find out.
Payment history is the most important factor that is considered for calculating your credit score. It will be high if you have never defaulted on your payments and have been very regular. On the other hand, it will be low if you are not proper or regular in your payments.
The second factor is credit utilization ratio which shows how much credit you actually utilize compared to how much you have available. The lesser you use the better the score.
The next factor is the length of the credit history – the longer the history the better the score. If you have a longer credit history with no issues, then you are a person who pays your dues on time and a “good bet” according to banks.
Credit mix comes next which is how many different types of credit accounts you have, secured or unsecured credit etc. will all come into play.
The last one is new credit – If you have too many new accounts your credit score would indicate a lack of history on which the lender could deduce your worth.
2. The best score to have
It is generally accepted that a good credit score is 700 and above on a 300-900 scale. A 700+ score would indicate that you have very good track record.
3. Credit report doesn’t always give the right credit score
A wrong score on your credit report might have errors in it that could cause your score to be wrong. Another scenario is that your lender might not have updated the credit bureaus about your account which could attribute to a low score. We would advise that it is always best to get your yearly mandatory free credit report to check for any such discrepancies and sort them out.
4. If you don’t use any credit for long time your scores can drop
Now I can see you reading the above sentence more than twice to see if you read it right. You did. This is because lenders tend to cancel credit card accounts which have been inactive for long will be removed, once they are removed it could affect your credit utilization ratio and result in score dropping. To counter this maintain active accounts.
5. Filing for bankruptcy can nose dive your credit score
Did you know that a bankruptcy filing will be in your credit report for 10 years? This is the reason why most people or financial advisors do not go for or advice filing for bankruptcy. Once done you cannot get unsecured credit and your credit score takes a nose dive. To improve your score after filing bankruptcy you need to first make sure the filing was done properly, and all the debt account named under the filing are marked as discharged. Post which you would need to avail a credit improvement services.
6. Cosigning a loan with someone could affect your credit score
When you are named as the co-signor for a loan the bank will check your credit score also. This will be a hard check which means your credit score will take a hit as you are shopping it for credit though it is only as a guarantor for a friend or relative. Make sure you want to do this or if you are not in the process of applying for credit yourself before co-signing for a loan.
7. Bounced checks do not affect your credit score
Bounced cheques to not affect your credit score. As the credit bureaus like CIBIL™, Equifax, Experian and CRIF High Mark only deal with information on credit like loans and credit cards associated directly with financial institutions, any bounced check owing money other than financial institutions will be not reported by the bank or NBFC.