A credit score is a number that reflects your ability and willingness to make repayments. It is contained in a Credit Information Report (CIR) that is an aggregate of all the credit information about an individual in the banking system. Banks and other financial institutions use the credit score as a screening mechanism to determine whether you are eligible for a loan.

There are 3 credit bureaus in India that issue credit scores. All credit information companies (CIC’s) or credit bureaus use certain common inputs when calculating an individual’s or corporate’s credit score. Each of them has their own methodology and scoring range. Most lenders report repayment data on a monthly basis to the credit bureaus, for both defaulters and those repaying on time. The credit bureau utilizes this data in order to compute a credit score, which provides a good indicator to future lenders of a person’s probability of repaying a new loan. Some of the factors that influence the credit score and thereby a person’s ability to borrow in the future are:

        • Late payments / missed payments
        • Large number of credit cards or loans in proportion to declared income
        • Utilization of the allocated credit limit
        • High percentage of unsecured credit
        • Duration of credit history
        • Too many loan applications in a short time span 
        • Settlement of loans in the past or past defaults

Repayment History:

Prompt repayment on existing loans and credit cards tends to have the largest positive impact on the credit score. Conversely, as the delay in making repayments increases, there is an increasing negative impact on the credit score. The higher the percentage of on-time payments, the better your score. This is one of the more heavily weighted factors used when calculating your score since a consistent pattern of timely payments denote a reliable borrower. Banks are reassured that you will make payments on time. By the same token, even one or two late payments can have a significant negative impact on your credit score as it implies that you cannot be relied on to make on-time payments. Paying all EMIs, credit card and all other bills on time is a very important factor in gaining a good score.

Number of credit accounts:

Credit bureaus look at the total number of loans (vehicle, housing, student or personal loans) and credit cards to determine your credit score. A larger number of loan accounts implies that a variety of lenders have found you loan-eligible and this will increase your score. However, this factor is relatively lightly weighted compared to other factors. It is also not advisable to apply for several loans or cards at once just in order to have a higher number of credit accounts and thereby trying to increase your score. It signifies that you are in urgent need of credit and have approached multiple lenders at the same time in search of credit. If the number of loans / credit cards is disproportionately high when compared to the declared income, it is likely to have a negative impact on your credit score.

Utilization of allocated credit limit:

If you have 3 credit cards with a credit limit of Rs.1 lakh on each, and tend to almost fully utilize the credit limit at all times, the probability of a new credit card application being rejected is high, as banks may consider you to be credit hungry. Similarly, if you do not utilize the 3 credit cards and apply for a fourth card, it is likely to be rejected, since banks may feel that you already have excessive unutilized credit limits. It is therefore best to use less than 50% of the credit limits at all times in order to have the best impact on your credit score.

High percentage of unsecured credit:

It is best to have a good mix of both secured (home loan, vehicle loan) and unsecured (personal loan, credit card) credit in your portfolio. This has the most positive impact on your credit score. Having a mix of different types of loans where you can demonstrate prompt repayment behavior will have a positive impact on your score. If there is a high percentage of unsecured loans in your portfolio, this is likely to have a negative impact on your credit score.

Length of credit history:

The longer your credit history, the more reassured banks are that they have more detailed information on your credit behavior. For instance, if you have a credit card for ten years, potential lenders can see your repayment activity on that card for a significant period of time. However good your credit is on a new card, banks are wary as they do not have sufficient information on your repayment patterns. Thus it is recommended not to give up older credit cards as they are the ones who provide a fuller credit picture to your potential lenders.

Excessive loan applications:

Every time you apply for a new loan or credit card, the lender will obtain a copy of your credit report in order to determine whether you are loan eligible. This is called a credit enquiry. Too many credit enquiries, without a corresponding approved loan tends to have a negative impact on your credit score. If you find that one lender has rejected a fresh loan application that you made, it is highly likely that other lenders will also reject your credit application. In addition, even if the loan application is approved, too many applications within a short period of time, are likely to have an adverse impact on your score.

Number of negative markings:

A negative mark could denote one of many things – write-off, settlement, DPD, suit filed, etc. This again is a heavily weighted factor and a relatively large number of negative marks could severely restrict your eligibility for a loan. A negative mark indicates that you have not been able to adequately manage your credit in the past and will warn potential lenders

How CreditMantri can help you?

At CreditMantri, we assist our clients to procure their credit bureau report and credit score, conduct a detailed review and produce a comprehensive Credit Health Report. This report contains recommendations on how to improve and maintain one’s credit score. Our primary intent is to improve the credit score of our client and make them “loan worthy” within a reasonable period of time.

CreditMantri can also assist with filing a dispute to correct errors in your report, negotiate with your existing lenders and may even be able to speak with potential lenders to assist you to obtain new credit. If you loan applications are getting rejected, or if you are planning to apply for a housing loan within the next 12 months, this may be a good time to contact CreditMantri.