Did you know that your credit report alone can compel a lender to turn down your loan application?
Banks are becoming increasingly reliant on credit scores as part of their loan sanction process. And why not? A good credit score is an indicator of credit worthiness of the borrower.
It does not end there. Banks have started to even link loan interest rate to your credit score. Higher the credit score, lower the interest rate you pay. Who knows, in the future, you may have to submit your credit report along with your job application?
If you are going to apply for a personal loan, credit card, home loan etc. it’s all the more important that you check your credit report and score first.
Well, first things first.
You can’t protect the credit score from damage unless you know what you need to protect it from. That brings us to the first important question:
What actions can damage your credit score?
There are several actions that affect your credit score. Some of the most significant are as follows:
#1. Late Payments
Paying your credit card bills or loan EMIs late is one of the biggest reasons behind low credit score. Unfortunately, a large number of people don’t take late payments seriously.
If you want to minimize the risk of damaging the credit report then you must consider every single credit card bill and EMI most importantly. By paying your bills on time on a consistent basis you can easily increase your score and protect your Credit Score.
#2. Lack of Credit Diversity
If you think that by just using a credit card responsibly you can achieve a high credit score, then you are wrong. Sticking to just one form of credit will offer little help. Instead, you should try to diversify the credit portfolio by availing a small personal loan, car loan, etc.
You can do with a healthy mix of secured and unsecured loans. In fact, the greater the variety of credit in your report, the higher will be your score. Do note that you borrow indiscriminately just to add diversity to your credit portfolio.
#3. Closing Old Accounts
Credit history makes up for a large chunk of your credit score. In fact, most credit rating agencies use it for 30% of the overall score. So, by deciding to close an old bank account or credit card account you can shorten the credit history and thus hurt your score.
You should never close your accounts without thinking twice. So, if you have several credit cards and you want to close a few to make money management easier then it’s better to close the ones that are recently opened.
#4. Minimum Credit Card Payments
Do you often like to make minimum credit card payments instead of full? If your answer is “yes”, then chances are that you are hurting the credit score in the process.
This is because although a minimum credit card payment keeps penalties and fines at bay, the remaining balance is carried to the next month and gets collected as debt.
If you like to make minimum payments frequently then you can end up with a huge debt that’s detrimental to your credit score.
So, these were some of the things you must be careful about to ensure a healthy credit report. But do you know how to analyze this credit report properly? Let’s jump to the next question then.
What to look for when you check your credit report?
Reading a credit report isn’t rocket science. However, there are certain things that you must know about when you are reading yours.
By the way, you do not need to spend a penny to access your credit report. You can download a free credit report per credit bureau per calendar year.
The following are some of the important things to look for in your credit report:
#1. Accuracy in Details
Discrepancies in a credit report can easily lead to a poor credit score. So, one of the fundamental things you must look for in the credit report is the accuracy of the details. Check your personal details, account information, credit information, etc. and see if there are any mistakes that need to be corrected.
#2. Unrecognized Transactions/Accounts
If you notice an outstanding balance on a credit card you surrendered a few years ago or a personal loan account that you never applied for, then it could be a case of identity theft.
Fraudsters can get their hands on your ID documents, bank account documents, etc. to make purchases through your credit cards, or apply for loans under your name. Fortunately, this can be easily identified through one’s credit report. If that’s the case, you must contact your lender immediately and take appropriate actions.
#3. Credit Score
Your credit score is one of the most important things you should check for whenever you receive an updated credit report. Be sure to compare it with your previous score so that you can monitor your progress.
#4. Comments/ Remarks
Although comments and remarks made in a credit report by banks and financial institutions aren’t as important as core details such as credit score and repayment history, they still bear some significance.
For instance, if a lender isn’t satisfied with the way you have repaid a loan, they may write some negative comments in your report. These comments have the potential to get your loan application rejected by influencing the new lender.
So, it’s best if you contact the institution that made such comments and request them to remove them.
How can anomalies be detected and rectified?
Mistakes and anomalies are more common in credit reports than you think. Even though a large part of credit score calculation and updating of information in credit reports is automated, mistakes do take place. Sometimes a bank sends wrong information to the credit bureau, and sometimes the mistake is on the credit rating agency’s part.
Fortunately, fixing mistakes in credit report is really easy and simple these days. Most credit rating agencies allow the customers to raise a dispute online.
So, you can simply inform them by filling out a standard form and mention the details you feel are erroneous. The agency will verify the request and make the changes in your report. Generally, you can check the updated report within 15 to 30 days.
Do note Credit Bureaus cannot act suo moto on your requests. Credit bureaus (such as CIBIL) cannot rectify errors (effect changes) in your credit report on their own. They simply pass on your observation to the banks and take action on their response. Therefore, there is no point pressurizing credit bureau to make the change. Follow up with the banks to expedite the process.
Your credit report is an important document that you will need your entire life. So, you must take good care of it.
By monitoring your credit report regularly, you can easily take appropriate action whenever needed. On that note, the tips above can be of great help in the endeavour.
This sponsored post has been contributed by Arun Ramamurthy, Co-Founder, CreditSudhaar. Credit Sudhaar offers credit advisory services in India. The views expressed are personal.