We at ValuCircles interact with several home loan seekers every day and one area where we observe a lot of concerns from them is Credit Scores.
As most people have a lot of misconceptions or questions about credit scores, we want to cover some critical aspects that might be useful for loan seekers. The seven most important things about credit scores are as given below:
1. Credit Scores and Credit Reports are not the same
A Credit Score is a numeric score calculated based on the information in your Credit Report. It is generally in the range of 300 – 900 if you have a credit history. If you don’t have credit history it may be 0, or NA. The Credit Report, on the other hand, is a detailed report of your loan/credit accounts, repayment history, and recent loan/credit applications. So when you receive your credit report you should check not only your score but also your full report thoroughly.
2. Four key factors that impact Credit Scores
Following are the key factors that are scored:
Consistent payments for your credit accounts improve payment history, while late payments/defaults have a negative impact
Credit Usage or Utilization
This is usually calculated for credit cards. It is the ratio of the credit card balance to the overall credit card limit. Lower usage/utilization will have a positive impact on your credit score.
Age of Credit
Older credit accounts positively impact your credit scores whereas closure of old credit accounts and opening of new credit accounts on a regular basis negatively impacts it.
Recent Inquiries or Credit Applications
Recent applications for loans/credit cards will negatively impact your credit score as they indicate an increase in the need for credit. If your credit report indicates multiple recent inquiries or applications this will further raise a red flag.
3. You are entitled to get an annual Credit Score & Report for free
There are four credit bureaus in India – CRIF HighMark, CIBIL TransUnion, Experian, and Equifax. Each of these four bureaus is required to give you an annual credit report and score for free. At ValuCircles, we provide you a free CRIF HighMark credit score as part of our home loan LPi assessment.
4. Checking your own score will not negatively impact it
There are two types of credit inquiries. Soft inquiries are when you yourself check your credit score or you authorise a service provider (like us) to check your score and have it sent to you. These soft inquiries DO NOT have a negative impact on your credit score. Hard inquiries are when a lender checks your credit score/report to take a decision on your credit application. These hard inquiries will have a negative impact (usually relatively small) on your scores.
5. Being a co-applicant on a loan also impacts your score
If you are a co-applicant on a loan account then the account activity of that loan will have an impact. So when you sign up as a co-application for any loan, please ensure that you are monitoring the repayment activity and health of that account.
6. Incorrect information on your credit report can be corrected
The credit reports are created based on data that is provided by banks and lenders to the credit bureaus. If you see any errors or misrepresentations you can raise a formal request to the bank/lender and the credit bureau to rectify the error. This usually takes time and will require evidence, but diligent follow-up will result in correction if warranted.
7. Credit scores are not the only thing that banks use to decision your loan application
Your credit score is a measure of your credit history. In the past we have seen loan seekers with good credit scores have later defaulted on loans and similarly, loan seekers with low credit score go on be good credit holders. This is why banks and lenders consider several additional criteria when reviewing your credit/loan application.
At ValuCircles, we have built LPi keeping in mind these additional criteria to closely emulate the bank/lender decision-making process. This has enabled us to help loan seekers, even those with no or low credit scores, to find the appropriate lenders for buying their dream home.
If you have further questions on Credit Scores or impact of Credit Scores on Home Loans, do write to us in the comments section and we will get back to you at the earliest.