This first blog in a series of two…brings forth some important factors that must be kept in mind to have a healthy Credit Score as it determines your credibility for new loan approvals, notes APLUS CAPITAL.
Credit gives you the flexibility to spend undoubtedly, but, to enjoy this luxury you need to keep some basic important factors in mind…that starts with Credit Card score. In layman language, Credit Score helps a lender in determining your trustworthiness and goes a long way in deciding whether you lie in the category of those individuals who can qualify for either a Credit Card or a loan.
A borrower’s credit history plays a pivotal role in determining his credit score. According to CIBIL or Credit Information Bureau (India) Limited, faster loan approvals are usually achieved by those individuals who have a credit score of at least 750 points, with 300 to 900 being the range of credit score.
Other key points that heavily impact your Credit Score include:
AVOID RED FLAGS CREATED BY DELAYED PAYMENTS: Delays in payment of your EMIs puts a red mark on your credit history. Same applies if you miss the due dates of your credit card bill payments. In fact, a single payment delay or miss puts a question mark on your credit score, duly seen in your credit report, as it showcases the total days for which the dues remained unattended after the due date. Therefore, make it a thumb rule to make all your payments on time. Always remember it takes nearly 6-8 months to get your derailed credit score back on tracks…which can lead to a major financial crisis in your life.
A WELL-MAINTAINED CREDIT UTILIZATION RATIO IS ESSENTIAL: How much credit amount is taken from the allowed credit limit helps in knowing the Credit Utilization Ratio. Let us assume you have a credit card limit of Rs. 2 Lacs and you use Rs. 50,000 of it. The corresponding Credit Utilization ratio is only 25%.
The Credit Utilization Ratio is calculated by determining the total available credit limit on all the credit cards a person is holding. For instance: If you hold 3 credit cards each having a credit limit of Rs. 75000, Rs. 1.25 Lacs, 2 Lacs respectively and you use just Rs. 80, 000 of the three credit cards that you have in possession. In this case we will say that the Credit Utilization Ratio, is 20% (calculated as 80,000/4,00,000 and represented as percentage).
Generally, loan applicants having a Credit Utilization Ratio of as low as 40% of the total limit are given due preference by loan or card issuers. Hence, it goes without saying that the lower your Credit Utilization Ratio, higher is your creditability. Another way to improvise your Credit Utilization Ratio is timely payment of your credit card bills. You should also avoid excessive use of your credit limit.
MAINTAIN AN APT EMI-to-INCOME RATIO: This is another significant factor that borrowers need to keep in mind. With the assumption that a borrower will require at least half his income to deal with his living expenses, maximum EMI-to-Income Ratio is usually taken as 50%. In fact, it’s a standard ratio followed by most lenders. Calculated by dividing your monthly loans and credit card repayments with your salary, EMI-to-Income Ratio, financial pundits say that your EMIs should remain in the bracket of 25-30%. If it breaches 50%, you are considered to be in a state of financial crisis where immediate correction of your finances is required.
GET ‘CLOSED’ STATUS for ALL PREVIOUS LOANS: Your Credit history takes note of any defaults committed by you in the past by lowering your credit score. As they are reported to the credit bureau in a similar fashion they lower your credit worthiness in the long run and diminish your chances of getting a new loan sanctioned. Hence, get all your previous payments a “closed” status…as it portrays your ability to repay a previously borrowed amount, while a “settled” status questions your loan repaying capability.
Besides the above mentioned points, maintaining a flawless credit report, non-existence of credit history and last but not the least, using your credit limit judiciously, are some other essential factors that deeply affect your Credit Score.
WAIT for APLUS CAPITAL’s next blog where the aforementioned points will be discussed in ample detail.
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