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The
return a lender seeks factors in a premium for the risk
he feels he bears of not being paid back. This risk perception
is different for different borrowers and is determined
from your credit history. Till recently financial institutions
had only their own experience with an individual to fall
back on for this assessment. That is changing now with
the entry of agencies that assess the creditworthiness
of people like you.
The Importance of Your Past Credit
Knowing your credit history early - and working to maintain
and improve it - can improve the terms of your loan as
well as your long-term financial health.
Your credit history is one of the factors lenders will
consider when deciding what kind of loan you qualify for
and the credit terms they will offer. Your credit report
and score reflect your credit management history, so you
can't improve them overnight. But there are steps you
can take to make sure you have the strongest credit history
possible when you're ready to apply for a loan.
Reduce your debt
Lenders will consider your debt-to-income ratio. If you
have outstanding loans or credit card debts, try to pay
off as much as possible. Acceptable debt-to-income ratios
differ from lender to lender. In some cases, a high debt-to-income
ratio can be offset by other factors more favorable to
you.
If you have less than perfect credit
Don't despair if you have less than perfect credit. While
it's good to do what you can to improve it.
What's in Your Credit
Report
Although each credit reporting agency
formats and reports information differently, all credit
reports contain basically the same categories of information.
Identifying information
Your Name, Address, PAN number, Date of birth, and employment
information are used to identify you. Updates to this
information come from information you supply to lenders.
Credit accounts
Lenders report on each account you have established with
them.
• Type of account (credit
card, auto loan, mortgage, etc.).
•
Date you opened the account.
• Your
credit limit or original loan amount.
•
Account balance. Even if you pay off your credit cards
in full each month, your report
may show a balance on those cards (generally the total
balance of your last statement).
• Your payment history.
• Closed accounts.
Inquiries
(requests for your credit report)
When you apply for a loan, you authorize your lender to
obtain a copy of your credit report. This is how inquiries
appear on your credit report. The inquiries section contains
a list of everyone who accessed your credit report.
Factors That Affect
Your Score
Many lenders use a score — a numeric calculation
of your credit report calculated— to obtain a fast,
objective measure of your credit risk. By understanding
the factors that can help or hurt your score, you'll have
a better understanding of how lenders view you as a credit
risk — and how you can improve your score.
Here are the five factors that determine your score. The
levels of importance shown here are for the general population,
and will be different for each individual:
1.
Your payment history: what is your track record?
The most significant impact on your score is whether you
have paid past accounts in a timely manner (on or before
the date the payment was due). However, an overall good
credit profile can outweigh a few late payments, and late
payments have less impact over time.
2. Amounts
that you owe: how much is too much?
Part of the science of credit scoring is determining how
much debt is too much:
• In some
cases, having a very small balance without missing payments
shows you've managed credit responsibly,
and may be slightly better than having no balance
at all.
• While you don't want
to have too many accounts open, it's good to have more
than one, so that you're not using
too much of one account's available credit limit.
• Owing a lot of money on numerous accounts
suggests to lenders that you may be overextended
and more likely to make late payments — or make
no payments at all.
3.
Length of your credit history: how established is it?
In general, a more seasoned credit history will increase
your score. Lenders want to see that you can responsibly
manage your credit accounts over time. However, even those
people who have not used credit for an extended period
of time may get high scores, depending on how the other
information in their credit report appears.
4.
New credit: are you taking on more debt?
Opening several credit accounts in a short period of time
can represent a greater risk, especially for those with
newer credit histories. Scores try to distinguish between
an attempt to obtain many new credit accounts and an attempt
to obtain the best interest rate. Scores generally do
not associate higher risk with shopping for the best interest
rate.
5. Types of credit in use: is it a "healthy"
mix?
Your score will reflect your mix of credit cards, retail
accounts, installment loans, finance company accounts
and mortgage loans, etc. While a healthy mix will improve
your score, it's not necessary to have one of each, and
it's not a good idea to open accounts you don't intend
to use.
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