He told me that a home loan he had applied for was rejected! The reason? ‘Poor credit score.’
He wasn’t aware of the significance of his credit score, and the bank official advised him to first improve his score and then re-apply.
Having already paid a considerable non-refundable deposit to the builder, he was worried about losing the money and getting the loan approval. He was unsure of his next steps, and that’s when he turned to me.
This scenario points directly to the lack of awareness around credit scores, particularly in developing countries.
After understanding his problem, I explained what credit scores are, how they can drop, and the steps to improve them.
Eventually, he managed to boost his credit score significantly and successfully got the home loan from the same bank that had rejected him earlier.
To learn how he succeeded, continue reading his story at the end of this article.
So, What Is a Credit Score?
A credit score is a numerical representation of an individual’s trustworthiness as a borrower, typically ranging from 300 to 900. It reflects the likelihood that the borrower will repay loans on time. Financial institutions, such as banks, use this score to assess an individual’s ability to repay debts.
What Are the Credit Score Ranges?
Credit scores are categorized into ranges that reflect how likely an individual is to repay a loan. Here’s a breakdown:
- 750-900: Excellent – This range means easy approval for all types of loans and credit cards, along with low interest rates.
- 700-749: Good – Eligible for better interest rates on loans and credit cards, but not as ideal as the excellent range.
- 650-699: Fair – You can still get loan approval, but there might be conditions attached.
- 600-649: Doubtful – Difficult to get loans or credit cards; more stringent terms are likely.
- Below 600: Poor – Loan approval chances are very limited.
What Are the Advantages of a Good Credit Score?
A borrower with a high credit score (750 and above) will enjoy several benefits:
- Easier loan approvals: With a good credit score, you’re much more likely to get approved for loans.
- Lower interest rates: High credit scores often lead to lower rates, saving you money in the long run.
- Higher credit limits: Your creditworthiness allows you to negotiate for higher limits.
- Better loan terms: You may have the ability to negotiate terms such as repayment duration or flexibility.
How to Maintain a Good Credit Score?
Maintaining a high credit score requires consistency and careful management. To keep your credit score healthy:
- Pay your bills on time: Your payment history makes up 35% of your credit score. A clean, on-time payment record is vital.
- Control credit card utilization: Keep your credit utilization ratio below 30% of your credit limit.
- Diversify your credit: Experience with both secured and unsecured credit can positively impact your score.
- Avoid multiple loan applications: Every loan or credit card application results in a hard inquiry, which can negatively affect your score.
Note: Having too many credit cards, paying only the minimum balance, requesting frequent credit limit increases, or not canceling old credit cards can hurt your credit score.
How to Improve Your Credit Score?
Improving your credit score takes time, but it’s definitely possible. Here’s how you can boost your score:
- Close old credit cards: Cancel cards you don’t need. However, don’t close your oldest card, as it impacts the length of your credit history.
- Avoid requesting discounts for settling dues: Pay off outstanding balances in full for a clean slate.
- Pay off outstanding loans: Ensure all loans, including secured (home and auto loans) and unsecured (personal loans and credit cards), are settled on time. Get ‘No Dues Certificates’ from lenders when closing loans.
- Use a credit builder loan: These are small loans with a short duration, designed to help you improve your credit score. Apply for these loans, repay them on time, and continue the cycle until your credit score improves.
- Maintain a good mix of secured and unsecured credit: This demonstrates your ability to handle different types of debt responsibly.
- Make joint account payments on time: Joint accounts affect both holders’ scores, so ensure timely payments.
- Pay all your bills on time: This includes utility bills, phone bills, and others. Set up reminders to avoid late payments.
Main Factors Deciding the Credit Score
There are several factors that influence your credit score, and these may vary slightly by country. The most common factors include:
- Payment History (35%): This includes on-time payments, partial payments, or missed payments.
- Amounts Owed (30%): The total amount of debt you owe across all credit accounts.
- Length of Credit History (15%): The longer your credit history, the better.
- Credit Mix (10%): A diverse mix of credit types (secured and unsecured loans).
- New Credit (10%): Applying for new loans or credit cards can impact your score due to hard inquiries.
Important Things to Know About Your Credit Score
- Income, savings, or investments don’t impact your credit score. Only your debt activities and credit history matter.
- Your credit score is private: It’s shared only with trusted entities like banks, lenders, and certain employers.
- Credit score reflects only your payment behavior: Defaulting on a payment or closing active or inactive accounts will affect your score.
- Credit scores are not easily edited: They’re generated based on your actions and cannot be manually changed.
- Credit score doesn’t guarantee loan approval: While it’s important, lenders consider other factors during their approval process.
- Late payments: A missed payment will affect your score, but payments missed over 3 years ago are generally not counted.
- Free credit reports: You’re entitled to free credit reports from authorized agencies or credit monitoring services.
Who Has Access to Your Credit Score?
Your credit score can be accessed by various entities:
- Banks and Financial Institutions: To approve or deny loans and credit applications.
- Insurance Companies: To determine premiums.
- Creditors and Mortgage Lenders: For mortgages and credit card approvals.
- Government Agencies: To assess your eligibility for government services.
- Employers: Some employers may review your credit score when hiring for specific roles.
- Utility Companies and Landlords: To determine deposit requirements or rental eligibility.
Frequently Asked Questions
Q. How Do You Get a Free Credit Report?
You can get a free credit report once a year from each of the three major credit bureaus—Equifax, Experian, and TransUnion—via AnnualCreditReport.com. This is the only federally authorized site for free credit reports, and you can also request one if you’ve been denied credit, are a victim of fraud, or have had certain financial hardships.
Q. How Long Do Inquiries Stay on Your Credit Report?
Hard inquiries, which occur when a lender reviews your credit for a loan or credit card, typically stay on your credit report for two years. However, they only impact your credit score for the first year, and their effect diminishes over time.
Q. How Long Does a Late Payment Stay on Your Credit Report?
Late payments can stay on your credit report for up to seven years. However, the impact on your credit score lessens over time, especially if you continue to make timely payments afterward.
Q. How Long Do Collections Stay on Your Credit Report?
A collection account can remain on your credit report for seven years from the date of the original missed payment that led to the collection. It's essential to resolve collections quickly to minimize their impact on your credit score.
Q. What Is the Highest Credit Score?
The highest possible credit score is 850 on the FICO scale. While it's difficult to reach, striving for a score above 750 is considered excellent and will offer you the best lending opportunities and rates.
Q. How Can I Improve My Credit Score?
Improving your credit score involves a combination of timely payments, reducing credit card balances, avoiding unnecessary credit inquiries, and building a longer credit history. Regularly monitoring your credit report for errors and disputing inaccuracies is also crucial.
Q. What Factors Affect My Credit Score?
Your credit score is influenced by several factors, including:
- Payment History (35%)
- Amounts Owed (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Credit (10%)
Q. How Often Should I Check My Credit Report?
It’s recommended to check your credit report at least once a year to ensure there are no errors or signs of fraud. You should also check after major financial events, like applying for a loan or experiencing identity theft.
Q. Why Is a Good Credit Score Important for Getting a Loan?
A good credit score signals to lenders that you're a reliable borrower, increasing your chances of approval and qualifying you for lower interest rates. Lenders rely on your score to assess the risk of lending money to you.
Q. What Is Considered a Good Credit Score?
A good credit score typically ranges from 700 to 749. Scores above 750 are considered excellent, and scores below 650 may make it difficult to qualify for loans or credit cards.
Q. How Long Does a Negative Item Stay on My Credit Report?
Negative items such as late payments, collections, or bankruptcies can stay on your credit report for up to seven years. The longer these items remain, the less impact they generally have on your credit score.
Q. Can I Dispute Errors on My Credit Report?
Yes, you can dispute errors on your credit report by contacting the credit bureau directly. Provide supporting documentation to prove the error, and they are required to investigate and correct it, usually within 30 days.
Q. What Is the Difference Between a Credit Score and a Credit Report?
Your credit score is a numerical representation of your creditworthiness, whereas a credit report is a detailed record of your credit history, including your loans, credit card usage, and payment behavior.
Q. Does Closing a Credit Card Hurt My Credit Score?
Closing a credit card can negatively impact your credit score by reducing your credit utilization ratio and credit history length. It may also decrease the total available credit, which could lead to a higher utilization rate on remaining cards.
Q. What Should I Do If I Have Identity Theft on My Credit Report?
If you notice signs of identity theft, immediately place a fraud alert or credit freeze on your credit report, contact the credit bureaus, and dispute the fraudulent entries. You should also report the theft to the Federal Trade Commission (FTC) and file a police report.
Q. How Can I Improve My CIBIL Score?
To improve your CIBIL score (in India), focus on maintaining timely payments, reducing outstanding debt, and managing a healthy credit mix. Avoid missing payments, and consider using a secured credit card if you're new to credit.
Q. What Are the Most Common Credit Score Problems?
The most common issues that affect credit scores include missed payments, high credit utilization, frequent credit inquiries, and inaccurate information on credit reports, such as debts that have already been paid off.
Q. Why Do I Have So Many Different Credit Scores?
Different credit bureaus may calculate your score using different formulas, and lenders might use their own version of the score. Additionally, scores vary based on timing, as they’re updated with each credit activity.
Q. How Old Do You Have to Be to Get a Credit Card?
In most countries, you must be at least 18 years old to apply for a credit card. If you're under 21, you'll typically need to show proof of income or have a co-signer.
Q. What Is a Secured Credit Card?
A secured credit card requires a security deposit, which acts as collateral. It's a good way to build or rebuild credit because your credit limit is usually equal to your deposit amount.
Q. How Do I Fix My Credit?
To fix your credit, focus on making timely payments, reducing your credit card balances, and avoiding taking on new debt. Regularly review your credit report for errors, and dispute any inaccuracies with the credit bureaus.
Conclusion
Now, let’s revisit the story of how my friend successfully improved his credit score.
“He spoke with the builder, who granted him a 6-month extension to pay the remaining amount. He took action by paying off all outstanding dues with his credit cards. He also closed unnecessary credit cards and settled all loans after getting the necessary no-due certificates. He applied for a small personal loan, repaid it on time, and avoided missing any payments by setting alerts.
In just 6 months, his score shot up to 770, and he approached the bank once again. This time, with a significantly improved credit score, the bank approved his home loan without hesitation.
He bought his home, continued repaying the loan on time, and is now a happy and responsible borrower.”
What About You?
Does this matter to you? Are you looking for more information or help with improving your credit score? Feel free to share your experiences or ask questions in the comments below. Let’s all learn together!
