Does Everything In Your Credit Report Affect Your Credit Score?

Your credit score is one of the most important factors your lender uses to determine whether you are eligible for a home loan. The three digits in your credit score play a massive role in helping banks and financial institutions decide whether to lend to you.

Yet, many home loan buyers do not know much about credit scores and credit reports. They find it difficult to understand what is important and what can be ignored in credit reports. In fact, many prospective home loan borrowers do not check their credit scores and reports before applying for a home loan.

Your credit score is a reflection of how well you have handled your past credit transactions. If you do not know how to improve your credit score, keep in mind that all the keys lie within the scope of your credit report. But, you should be able to differentiate between what is important and what is not while reading your credit report.

MakaaniQ tells you what you must pay attention to in your credit report.

Before we move to the important components of the credit report, let us understand the vital factors that make your credit score look good or bad.

• Payment history: How timely you have made payments on your loans and advances in the past.
• Length of credit history: How long you have been using the credit and the chances and time to repay it completely.
• Types of credit used: Combination of secured and unsecured loans.
• Amount owed: Number of credits in use and outstanding amount in each.
• Number of new credit: Number of newly opened loan accounts or credit cards.

These will affect your credit score:

• Days Past Dues (DPDs): If you delay repaying your home loan even by a single day, this will affect your credit score negatively. DPDs can make or break your image as a credible home loan borrower. If the delay in payment was due to some technical error and not because of your fault, you need not worry. You just have to make sure that you have a supporting document that this happened because of a technical glitch. Lenders check DPDs to see how frequently you have missed payments. If you have repetitively delayed in making timely payments, this will have an effect not just on your credit score. Your odds of getting new credit will decline too.

• Secured vs unsecured loans: A secured loan is backed by security/collateral. Home loans, Loan against Property (LAP), auto loans and gold loans, for example, are secured loans. Loans such as personal, credit card, consumer and overdraft are unsecured debt. Higher your unsecured debt, higher the risk of lending to you. This is why excessive unsecured debt affects your credit score negatively. As a loan borrower, you must entirely avoid intake/dependency on unsecured liabilities.

The tendency to default on unsecured loans is greater because such forms of credit are offered at a very high rate of interest. So, one unsecured debt is assumed to be manageable.

• Credit enquiries: Every time you apply for a home loan, or for that matter any form of credit, an enquiry is generated in your credit report. Do not think that an enquiry is created only when the loan is sanctioned. Even the “pre-approval” of loans will generate an enquiry. Hard credit enquiries can affect your credit score adversely. So, do not apply for loans/pre-approval of loans unnecessarily, because they can lower your odds of getting a loan when you will actually need one.

• Inaccurate/false information: Often, while assessing credit reports, lenders notice that there are errors, misreported entries or inaccurate information not committed/pertaining to the borrower. Such instances affect your credit score, and delay in processing of the loan application.

Such false information needs to be reported to the credit rating agency and must get updated. So, do not be under the impression that you have never defaulted because even if what you assume is right, your credit report may tell another story.

• Account information: The account information is more like a summary section of all your debts and credit cards which are/were in use. Many lenders calculate the utilisation ratio by using the information in this section. Your outstanding balances and total credit limits are given in this section. If you carry high balances and is still applying for new lines of credit, lenders are likely to view this with a healthy suspicion.

These will not affect your credit score:

• Personal information: Your name, address (current and previous ones), contact details and other such details will not affect your credit score.
• Employment details: Your current and previous employers' details will not affect your credit score.