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Get answers to commonly asked questions related to the credit score and credit reports
Credit history is the track record of a borrower's pattern of debt repayments. It is a report which shows how the borrower has dealt with payments in the past. The origin of that debt or credit availed can be from several sources, such as banks, financial institutions, credit card agencies, retail stores, collection agencies, and the government.
When you see your credit, you can see the names of various businesses which have requested your credit file. These can be the stores or agencies from where you have availed the credit or the prospective businesses who want to pitch their services to you.
Your credit history doesn’t include details such as your gender, income, or the fact that you receive government assistance. The higher the credit score the better it is because it signifies better creditworthiness.
The components of the credit score are as follows:
Talking about the length of the credit history, the longer the better. This helps to convince lenders that you have managed your credit well for quite some time. The longer the duration, the stronger it establishes your credit history. If you just started availing credit and have a shorter credit history, your lenders may be little hesitant to give you credit because they wouldn’t be convinced about your ability to deal with loans in the future.
Credit mix or the presence of different kinds of credit is also a major factor that impacts the credit history. The credit mix refers to the variety of different types of debt that you carry such as education loans,home loans,car loans,credit cards, etc. The more diverse the credit mix is, the more it is preferred. The lenders or agencies assessing your credit history get confidence that you can deal with various kinds of debts.
Your credit history not just contains the amount that is currently open but also the closed accounts involving debt that you would have handled in the past few years.
A credit history is a crucial factor in helping a lender decide whether to lend you credit or not. Whenever, you approach a bank, credit card agency or a retail store to ask for credit, whether it is for purchase of a good or loan for a specific purpose, they will try to access your credit history to see how you have fared in the past. They will study the trend of your repayment and the pattern of availing loans. This will give them a better picture as to whether they should lend you credit or not. Once the credit history instils confidence in them about your repayment capacity, they are convinced to have you as a borrower. Not just credit history, the lender may also look at your credit score to determine this. If you have a negative credit history with bad debts and foreclosures, it is unlikely for the lender to give you a loan. For example, if you know that your colleague Rohit has never repaid the money he borrowed from friends in the past, would you be keen on lending him money if he approaches you. Obviously, No.
Apart from taking the major decision whether to lend credit or not, the credit history also helps to decide the terms and conditions of the credit. The terms of credit include the principal amount, the rate of interest, the tenure of the loan etc. If you have a poor credit history, you may still get a loan, but the terms of the loan will be unfavourable, and you may have to pay a higher amount as interest throughout the lifetime.
A person’s credit history not only impacts their ability to get credit and the terms of credit granted, but you would be surprised to know that credit history can also influence parts of your life which is out of the context of loans and credit. As a matter of fact, not just the potential lender, but there are other parties which want to access your credit history.
Therefore, your credit history is very important because lenders, insurers, prospective employers, and others use it to assess your methodology of managing the financial responsibilities. Therefore, you understand how crucial it is to have a positive credit history. Always remember the following points about the importance of credit history:
Your Bill Repayment History
Your repayment history consists of 30%-35% of your credit score. In fact, your ability to make all your payments timely such as the utility bills, EMI for personal loan, home or car loan, mobile phone bills, credit card bills etc. has an immense positive impact on the credit history. Hence, you should always make it a point to pay all your bills on time.
Your Level of Debt Matters
It is not just how much debt you have but also the relative credit utilization ratio that matters. The credit card usage with respect to the credit limit assigned to you is the credit utilisation ratio. Similarly, the outstanding debt that you have on your home or car loan to the amount of total loan sanctioned is the level of debt. The lenders will not just see your credit history in absolute sense but in relation to many variables.
The Age of Your Credit History
The age of credit is also a significant part of your credit history. The older your credit history is, the better it is considered. This is because it convinces lenders that you have lot of experience in handling your credit and have been doing a good job at it. If you open newer accounts and shut down your existing accounts, it adversely impacts your credit history. Therefore, it is advised not to open too many new accounts at once.
Types of Credit on Your Report
There are mainly two types of credit account: Revolving and Instalment. Credit cards, purchase cards at retails stores are the best examples of revolving credit. On the other hand, instalment credit refers to the loans towards which you need to service an EMI or monthly instalment. Having both types of debts in your credit history is better for you because it suggests you have experience in handling various categories of credit. The credit mix of different types of assets such as education loan, car loan, home loan etc. is even better for your credit history.
Number of Credit related Inquiries
Every time you submit an application for a loan or credit card, an inquiry starts showing up on your credit report indicating that you have raised a credit-based application. This inquiry is initiated by the lenders which is called hard enquiry. While one or two random queries will not make a difference, if too many inquiries start showing up, then it will impact your credit history adversely.
Checking your credit score or credit report is called soft enquiry which can be done several times in a year and it will not have any impact on your credit score. It is also good to check your credit score often to know where you stand in terms of availing credit and your credit health.
High interest rates on your credit cards and loans
Your credit history when assessed thoroughly indicates whether you will be able to honour future repayments or default on your loan. Having a negative credit history indicates that you are a risky borrower. Creditors and lenders may grant you a loan under dire circumstances, but they may levy a forced compensation as a result of which you will have to pay a higher interest rate. Thus, if you have a negative credit history, you will end up paying more as interest than what you would if your credit history would have been positive.
Credit and loan applications may not be approved
Credit card companies do handle a certain amount of risk, but they may not entertain a bad credit history. If your credit history is less than favourable, your loan applications can be rejected, and you may not be able to reapply unless your credit history is rectified.
You might get denied for employment
Some high-profile jobs such as those at the mid and senior management levels in a financial organisation or an IT company demand that you have a clean credit history as a background check. If you do not have a satisfactory credit history, and have instances such as bankruptcy, credit default or foreclosure against your name, you may not get a good offer for your job. The employers are not much concerned about your credit details, but they want to look for the probable things that can impact your performance at work.
If you have not taken any credit so far, the chances are unlikely that you will have a credit history. In such cases, getting yourself a loan or credit card would be the initiation. There are score-builder loans specially designed for building your credit score. A credit card on the other hand also helps you build your credit history and earn reward points, discounts and offers as well.
You can build a positive credit history over a period by making regular timely payments. The very first steps to rebuild your credit history are changing spending habits, repayment behaviour, or budgeting strategy. If you continue to take efforts over a period, you can emerge as a more creditworthy borrower.
Firstly, do away with all the credit card balances. Make sure to spend only as much as you can pay within the billing date. Balance also means outstanding loan balance. Negotiate with your bank and try to pay off the remaining loan at the earliest. Long due loan balance and heavy credit card dues adversely impact your credit history.
If you notice there are inaccuracies and disputes in your credit report, make sure that you raise an issue immediately with the concerned authorities. Sometimes due to manual errors or typos, lenders may input a wrong information.This can impact your credit score.
You may think it is best to close a credit card that is old and out of use. However, it is not so. A good credit card account that you have managed well with timely payment is a boon. It enhances your credit score and it is one of the major factors that taken into consideration while evaluating your credit history. It conveys that you have managed a credit card well and made all timely payments.
This is one of the biggest factors that impacts your credit history. If you want to borrow money for a big purchase like house or car, it is best to ensure that you honour your other EMI commitments timely. EMIs not honoured timely will bring down your Credit Score and have an adverse impact on your credit history.
You may have a credit card but that does not mean that you will use it for everything. The utilisation of the credit in your finances should be limited to 30%. Credit utilisation ratio is the proportion of the borrower’s total available credit that is being utilized. If you are able to maintain this, it will have a positive impact on your credit score.
You can place a request for your bank to increase your credit limit. If you do this, it doesn’t mean you want to spend recklessly. Having more credit at your disposal and lesser utilisation of credit means that you are managing things wisely and this will have a positive impact on your credit history.
Always try to get a credit card that is secured. This means that the credit card should be obtained against your fixed deposit balance. This gives you and the issuing bank a confidence that you can repay your balances on time. The fixed deposit account is used as a collateral. Usually secured credit card is availed by borrowers who cannot get a normal credit card due to low credit score.
Build credit through new loans
Your credit history is all about how you have managed credit in the past as a borrower. The longer and stronger your credit history, the more the lenders are convinced about you as a borrower. Whenever you take a new loan, it gives you an opportunity to build credit and add to your history in the positive way. Apart from credit cards, you can also take different types of loans such as car loan, home loan or a consumer durable loan which gives you an advantage to your credit history. However, you must abstain from taking loans just for the sake of building your credit history. You need to borrow wisely.
Missed payments on loans
It will hurt your credit history if you have missed payments on any of your loans. Hence, make sure you have funds ready before the due date and do not let any of the payment defaults impact your credit history.
Reduces capacity to Borrow
New loans don’t just impact your credit history or credit score, it also reduces your capacity to borrow. Your credit history also depicts the number of loans you are currently handling and the monthly instalments that go towards these loans. So, whenever you apply for a new loan, the lenders would evaluate whether you can afford to repay back the loan if sanctioned. Hence, you must know when to stop taking new loans for a while and keep the number of open loans under a check.
Hits your credit score
New loans do have a certain impact on your credit score. If you have had a strong history as a borrower, new loans wouldn’t impact you much but if your credit history is weak, every time you take a new loan, your credit history will be adversely impacted. Hence, you must check the timing for availing new loans. Smaller borrowings like a new credit card or buying an electronic appliance on credit should be avoided if you have plans to take a bigger loan in future such as a home loan or car loan.
Number of Inquiries
Each time you apply for a fresh loan, your lenders assess your credit history. When they do a check, an “inquiry” shows up, this shows that someone was trying to extract your credit information. One or two inquiries are fine but too many inquiries might indicate that you are in a financial distress and impact your credit score. Hence, you need to be very careful every time you apply for a new loan.
Low Interest Rates on Credit Cards and Loans
Interest rate is the primary cost paid for borrowing money whether it is loan or a credit card. Obtaining the best interest rate in the market is directly related to your credit history. The better your credit history, the more favourable interest rate will you get in the market. You can leverage your favourable credit history to get lower rate of interest on your loans and credit cards.
Increased Chance for approval of Credit Card and Loans
While there is no guarantee about the approval of the loan that you have applied for, a good credit history will surely give you confidence. The lenders can be easily convinced about your ability to repay the loan with a strong credit history. This enhances the chances for you to obtain the loan at favourable terms and conditions.
Better Insurance Rates
Many insurers also check the credit history of the applicants before giving them an insurance. They believe that applicants with a bad credit history tend to file more claims and hence they must be charged a higher rate of premium. So, your weak credit history will lead you to pay more premiums on your insurance policies. Having a good credit history will save you from this and you can get better terms of the insurance policy.
A good credit report is very useful for you because it helps you to get credit whenever you require. The lenders are convinced with your ability to repay back the loan. On the other hand, a bad credit score makes it challenging for you to obtain credit whenever you need it and you may have to utilise your savings to meet an expense which may be urgent.
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