A Complete Guide to Creditworthiness
In case you are looking to apply for a loan or credit card, one parameter which will decide how simply you can get a loan or credit card is your credibility. The definition of credibility is the extent to which you as an individual or company might be considered suitable by the loan lenders or issuers for receiving the financial credit. A layman’s language refers to the potential to make your loan repayment on time.
In the case of personal finance, your credibility is measured by reviewing your credit report and score. Any potential issuer or lender will check your credit report as well as your score carefully to decide if you must be provided with a loan based on your previous repayment record and other important factors. Here, in this blog discussed, are the different parameters that impact your credibility and a few of the common myths.
Parameters that Impact your Credibility
While credit score is the measure of your credibility, the parameters which impact both aspects are certainly not the same when it comes to assessing your loan eligibility. Listed here are parameters which impact your credibility –
- Pending or late payments –
In case you have any pending or late payments from loan instalments or credit card bills in your credit profile, it will be against your credibility. Also important is how late such payments are. The more the delay, the more adverse the report will be.
- Negative info in your credit report –
If any negative information is mentioned in your credit report or if there is any incorrect information, then this may lower your credit report severely.
- Credit diversity –
In case you hold a mix of credit in your credit portfolio, which you can successfully manage, then this may have a positive outcome in your credit report, and hence it may even give you favourable points wherein credibility is concerned. Combination of loans and credit cards and the mortgages repaid if timely form an excellent mix of portfolio and increases your credibility.
- Age of your new credit account –
In case you have not placed an application for new credit in the last twelve months, then it will reflect positively in your report and increase your credibility. When you place the application for new credit, it hits your score over the short run, but the older your credit account becomes, as you conduct your repayments timely, it endows you with higher credibility.
- Your debt state –
Availing of a loan and credit card is not per se what impacts your credibility; it is the state of your overall debt. If you hold high debt, with high DTI (debt to income ratio), it tremendously affects your credibility. It is because such a high dent shows that you are a credit-hungry individual and may miss out on repaying your ongoing credit outstanding.
- Number of credit accounts with good balances –
While it might sound like an excellent idea to maintain a zero credit balance to check your credibility, lenders or issuers even factor in your number of credit accounts. It indicates that you are a spender who is calculative by nature and extremely cautious with money.
Note that while such parameters do not impact your credibility, not all of them may be considered by the lender. Distinct lending organizations use distinct criteria for assessing your credibility. However, to stay on the safe end, ensure to rank high on every criterion to have higher credibility.
- Parameters that do not hamper your credibility –
As there are zero specific outlined parameters that impact your credibility, there is even much ambiguity regarding these parameters. Specific parameters are not assessed and considered illegal if considered when establishing your credibility –
- Your income –
How much income you earn is not the parameter that decides your credibility. Latter is decided just based on your potential to repay your outstanding credit dues through your salary.
- Bank account balance –
Money in your account is not factored in when assessing your credibility, as it doesn’t impact your ability or intention to make the loan repayment.
- Gender, race, religious beliefs, and nationality –
All such parameters cannot be factored in when understanding your credibility and most certainly cannot become a basic criterion to turn down credit.
- Assets –
Assets that you own are not factored in for establishing your credibility as a loan or credit card applicant.
How to ameliorate your credibility?
Whether or not you are looking to obtain credit in the upcoming future, it is a great idea to come across as a credible applicant who has the potential to make on-time repayment. You can check your creditworthiness easily by fetching CIBIL score free report. Before you fetch your CIBIL score check online free report; remember that you can just fetch one free report from the CIBIL bureau every year, post which you must make a payment to get your CIBIL report.
As it is said, better to be safe than be sorry. Let’s look at a few of the best ways to ameliorate your credibility –
- Make payments of all your credit card dues and loan EMIs on time –
As your payment history heavily shows your credibility, it is crucial for you to make payment of all your dues by the due date. Even one missed deadline can negatively impact your credibility.
- Optimize your CUR (credit utilization ratio) –
Do not use up all your credit limits on your credit card because this will show that you are a borrower who is risky. Ensure to use just 30 per cent of your credit limit.
- Avoid applying for a lot of credit cards –
Having a lot of credit cards may show you as an individual who is in dire financial stretches, and for this, you use the credit through your cards to bail yourself out.
- Hold a diversified credit portfolio –
It is necessary to have a good credit mix in your portfolio to show decent credibility. This will show the potential lender your capability to manage different kinds of credits successfully.