Understand Credit Score

You have just short listed your dream house. Well…it took you more than a year, to find this lovely apartment. All you need to do is avail a home loan from the bank. Soon this lovely little house will be all yours.Unfortunately, the bank has rejected your home loan application.  You are shocked. So why has the bank rejected your home loan?

You find out, you have a poor credit score.  You have not paid your credit card dues in time. This has gotten you a low credit score. Your dream home remains a pipe dream.

 Why you need a good credit score?

You get a credit score between 300 and 900. If you have a credit score of 750 and above, your loan is easily sanctioned.You are regarded as a safe customer, having a low risk profile.If you have a score below this, you might not get a loan from a large Private or a Public Sector Bank. You would have to take a loan from a smaller bank, or even an NBFC, at a higher rate of interest.

What if you have never availed a loan?

If you have never availed a loan in the past, you will have no credit score. You need to have a minimum credit history of at least 6 months, to get a credit score.If you do not have a credit history (you have never availed a loan in the past), your credit scorecard would show a no-history status.  You also get a no-history status NANH status, if you had a credit history, but no bank/lender has reported it to a credit bureau, in the past 24 months.

Cibil has just launched a new risk meter. This risk meter is for those with a credit history, of less than 6 months. Your credit score is on a range of 1-5. A credit score of 1 signifies high risk and a credit score of 5, signifies low risk. If you have a credit history less than 6 months and a credit score of 4-5, you are regarded as a safe borrower.

Understand credit score

The Background Section

The background section has your personal details, so that the lender can identify you. It has details such as your name, your gender, your date of birth and your identity (voter’s card or passport). This section merely identifies you. It has no role in deciding, if your loan should be sanctioned or not. It serves as an identity proof to prevent identity fraud.

The account information

Your credit score is calculated based on your credit history, the type of loan availed (whether your loan is secured or unsecured), how you have utilized your credit limit on credit cards and the number of enquiries, lenders have raised , against your PAN card number.

Accounts Section

Payment History

Your repayments on past loans and credit cards you have availed in the last 36 months, is shown in the accounts section. This section shows your repayment for each month.This section shows a numerical value, for any late payments, you have made. The numerical value indicates the number of days, you are late for that particular month. A ‘000’ indicates prompt repayments.

Leverage

The bank wants to know how deep you are in debt, and this section gives the bank the info it seeks. Are you biting more than you can chew?Do you have any existing loans and are you prompt in making your EMI payments? The lender also checks your credit utilization limit. A high credit utilization means you are hungry for credit.

After reading this article you have learnt how to read your credit score. It is up to you, to maintain a good credit score.