Your credit score is a three-digit number calculated on the basis of your credit history. It determines your credit worthiness and usually ranges from 300 to 900. When you apply for a new credit account, it helps lenders in assessing your eligibility for it. The closer your credit score is to 900, the better will be your chances of getting loan approval from lenders.
It is agreed that credit score is not the sole factor that lenders consider before approving a loan application. However, there is no denying of the fact that a bad score can ruin your chances to get money when you need it the most. It has often been observed that people with excellent credit scores get credit applications sanctioned quicker than those with lower scores.
To get instant loan approvals, one must keep their credit scores as high as possible. But you can do that once you understand what impacts your credit score. Below we have listed a few factors that negatively impact your credit score and therefore must be avoided at all times. To learn more, read on.
1. Poor Payment History
Payment history is one of the important components of a credit report that shows how well a borrower has handled his/her credit in the past. A single miss or delay in paying the credit instalment can pull down your score significantly. Incomplete payments too affect your score negatively. Paying your credit instalments on time is the only way one can ensure a healthy credit. It gives an impression to your lenders that you are responsible and will pay back your debts on time.
2. High Credit Utilization Ratio
Credit utilisation ratio is the ratio of the credit utilised to the total limit available on all credit cards. It is always represented with a percentage symbol (%). For instance, if your credit card limit is Rs.10 lakh and you have utilised Rs.4,00,000 out of it then your credit utilisation ratio will be 40%.
Lenders prefer loan applicants with a credit utilisation ratio of less than 40% of their total credit limit. Therefore, one can say that lower the credit utilization ratio, higher will be your credit score. One can keep their credit utilization ratio in check by avoiding excess use of their credit cards and paying bills on time.
3. Multiple Loan Applications
There is no harm in applying for a new line of credit. In fact it helps you build your credit history and score. But when someone applies for a new credit account frequently, it raises a red flag for lenders. Such applicants are considered 'credit hungry' and are frowned upon by banks and other financial institutions. It may not have a big impact on your credit score like 'late payments' but gives off a bad impression about your credit profile to lenders. Therefore, such credit profiles either don't get a loan sanctioned or get it at high rate of interest.
4. Error on Credit Report
Errors such as spelling mistake of your name and default of your payment can dent your credit score significantly. To avoid such a scenario, it is important to check your credit report regularly. Get your credit report from credit bureaus every month and read it carefully to check for any error that might be there on your report. If you find an error, get it rectified by logging on to the respective credit bureau's website or by sending a duly filled dispute resolution form to the bureau.
5. Frequent Requests to Raise Credit Limit
Increasing credit limit of your credit card gives you an access to more money. Therefore, a lot of people request credit card companies to increase their card's limit whenever they can. While there is no harm in increasing a card's credit limit but there can be a significant impact on your credit score if these requests are made frequently. People who more than often get their credit card's credit limit increased are considered 'credit hungry' by lenders. Moreover, an increased credit if not used judiciously can harm your credit score.
6. Hard Enquiries
We have said this time and again that your credit score determines credit risk for lenders. Therefore, when you apply for a loan or a credit card, they request for your credit report from one or all of the credit bureau(s), which is called a hard enquiry. A hard enquiry is not good for your credit score. More the number of hard enquiries, worse it will be for your score. To save your credit score from being hurt by such enquiries:
- Avoid applying for new credit unnecessarily.
- Don't apply for a new line of credit if not eligible for it.
- Check your credit score beforehand (Again, to check eligibility).
- Don't request credit report from lenders. Instead request for it directly from credit bureaus.
7. No Credit History
This might be surprising to many but it is true that no credit history does nothing to improve your credit score. Your credit history contains a lot of information about you and your behaviour that helps lenders in assessing the risk factor associated with the probability of loan repayment. It contains information about your credit accounts, loan repayment history, loan enquiries and everything else that will help in determining your credit worthiness. Having no credit history means that lenders have nothing to assess your risk factor. They don't know whether you'll repay them money on time or not. Since you don't have an experience in handling the credit, they will most likely either reject your loan application or sanction it at high interest rates.
8. 'Settled' Accounts
If you thought your old defaults are not going to impact your credit score then you're wrong. As long as your defaults appear on your credit report, they are going to affect your credit score. If you see a default on your report, settle it as soon as possible. And also make sure that your credit account status shows 'closed' instead of 'settled'. Agreeing to a one-time or partial settlement can have a negative impact on your credit score. When your credit account's status shows as settled, it implies that the bank has agreed to accept a repayment amount lower than what was originally owed by the borrower. On the contrary, a 'closed' status of a credit account implies that the loan has been completely paid off by the borrower and can be relied on In future.