In life, there comes a moment when you need to prioritize on loaning a big amount of money for buying things that tend to become something of a necessity over a period of time, such as a new home or a new car. But before you decide to go to a bank or a financial institution and take out that loan, stop and consider this: what if you are not eligible enough to have that much-needed loan getting sanctioned by the concerned institution? At this moment, you might wonder, what the method through which such eligibility is determined by. Well, your credit worthiness determines how eligible you are for getting that loan, and it is your credit score that plays a vital role in finalizing that. Therefore, it is more than important to understand the relationship between your credit score and your credit worthiness.
Your credit is nothing more than the summary of your entire credit history, summed up and expressed via a three-digit number, after taking into the information provided in your credit report. Generally, these scores are in a spectrum and vary between 300 and 900 points, and perpetually take into consideration any information regarding your credit worthiness. While most banks tend to have their own, pre-defined cut-off values, usually a score of 750 or above is generally regarded to be good enough to get a loan; anything lower than this score makes the entire process a tad difficult.
In all this, you might notice that there is the mention of a credit report. A credit report is basically the report of your entire credit history, summed up in a manner that makes it easier for you to be assigned with a credit score. The impressiveness of your credit report determines the value of your credit score: the more impressive is your report, the better would be your score and vice versa. Therefore, in order to understand the dynamics of your credit report, let us look into detail the various contents of the report itself.
- Payment History: Perhaps the most important component of your credit report, it plays a very significant role in determining the credit score you are to be assigned. It is your past record of payments, as the name suggests, chiefly when it comes to making payments on your credit cards or your loan EMIs. The implications of this component are pretty easy to comprehend: if your payment history displays timely payments and a sound management of your financial affairs on a consistent basis, then a high credit score would reflect exactly this. Otherwise, a low credit score would be reflective of poor financial decisions and a history of chronic insolvency.
- Unserviced Debt: Banks or other kinds of lenders place a huge importance on the amount that you owe as debt before they could be able to grant you a loan. Your credit score could take a negative hit depending on the amount of unserviced debt you have accumulated and it could prove itself to be a huge obstacle when it comes to actually getting a loan. These debts could take the form of amounts that you owe on your credit card(s), mortgages or any other kind of loans you might have taken in the past. The best way to offset this adversity is by maintaining a record of regular payments and a low credit card balance, which would show you in a positive light among lenders and concurrently brighten up your credit score even further.
- Duration: Your credit score also takes into consideration the duration of your credit It is highly beneficial for you if you have a long history of credit usage, as long as it is not marked with instances of account mismanagement. While, admittedly, it takes up a period of time to build up an impressive credit history, it has the potential to positively impact your credit score, by raising it to a more-than-satisfactory level.
- New Accounts: Although not one of the most important factors as the ones mentioned above, the number of new accounts you might have opened has a definitive effect on your credit score as well. It places your credit score at great risk if you open new accounts if you are already burdened with financial obligations, putting off banks and lenders in general when the time comes for getting a new loan to be sanctioned. Do bear in mind that any new account that you open would inevitably create a credit inquiry on your credit report, by the concerned financial institution. If you open too many new accounts within a short span of time, in all likelihood your credit score would be adversely affected. However, it is also important to remember that you are able to make any number of soft enquiries (that is, enquiries that you make yourself) without affecting your credit score in any way.
- Credit Mix: Your credit score also reflects the fact that whether you have a good mix of various categories of credit. While this won’t make any significant difference to your credit score, it is pretty beneficial to have multiple accounts to be classified under different classifications, such as mortgages, credit cards, et cetera, as long as you are able to manage them with competency and in a stable manner.
While indeed a lot of other factors go into making a good credit report, in order to have a good and satisfactory credit score these factors need to be authenticated for these will be of immense help in proving your credit worthiness to potential lenders and financial institutions into the future.
If you want to know more on credit cards or how to calculate your eligibility for a credit card, do visit our website at www.chqbook.com/credit-cards to know more and to be more prepared when it comes to having a good reputation in order to get lucrative and attractive loans for yourself and for your entire family.