In case you are looking to place an application for a loan or credit sometime in the future, an important factor which will decide how simply you can get a loan is your credibility. Dictionary definition of credibility says it is the degree to which you or a company may be thought to be suitable by investors or lenders for getting financial credit. In other words, it is the potential to repay the loan by the due date. There are a lot of tips here about personal finance and credit repair – Daily Prosper.
In reference to personal finance, your credibility is computed in terms of your credit score in your credit report. Any potential loan lender will review your credit report and score thoroughly to decide if you must be provided with a loan based upon your previous track record and other parameters. For instance, if you applied for a home loan, then the lender may consider evaluating your CIBIL score before proceeding with your home loan application. The minimum CIBIL score for home loan approval is 750 and above. Thus, ensure to maintain a CIBIL credit score of at least 750 to get a home loan or approval for any other credit option.
Here in this blog, discussed are different parameters which impact your creditworthiness and a few common myths regarding credibility and how you can ameliorate it.
Important parameters that impact your credibility
While credit score is the measure of your credibility, the parameters which impact both such aspects are not the same when it comes to evaluating your loan eligibility. Listed here are a few parameters which impact your credibility –
∙ Pending or late repayments
If you hold any pending or late payment from loan instalments or credit card bills in your report, it acts against your credibility and also how late such repayments are. More the delay, the more adverse your report is.
∙ Negative info in your report
If any of the debt has gone in the collection amount or if there is any repossession of assets or filed for bankruptcy, these may impact your credibility negatively.
∙ Credit diversity
If your portfolio has a mix of credit that you are handling successfully, it may show up positively in your report and hence even endow you with favourable points wherein credibility is concerned. A combination of loans and credit cards repaid timely is good for your portfolio credit mix and enhances your credibility.
∙ Newest credit account age
In case you have not placed an application for a new credit option any time in the last twelve months, it may show up positively in your score and even increase your credibility. When you apply for new credit, this hits your score over the short run. However, as you make repayments timely, it endows you with higher credibility.
∙ Your debt status
In case you hold a high debt with a high DTI (debt to income) ratio, it negatively impacts your credibility. This dents your portfolio and lowers your chances of availing of a loan.
∙ Number of credit accounts and their balances
While it might sound like an excellent idea to maintain a nil balance in your credit, a good measure of credibility is to retain a few unused balances in your credit accounts. It shows that you are a calculative spender who cautiously spends money. Note that while such parameters do impact your credibility, not all of them are factored in by lenders. Distinct lending companies use distinct parameters for assessing your credibility. However, to stay on the safer side, ensure you rank high on every criterion for higher credibility.
Parameters that do not impact your credibility
As there are outlined parameters that impact your credibility, there is even ambiguity linked with these parameters. Specific parameters are not assessed and are thought to be illegal for establishing your credibility. These include –
Your income –
The amount you earn is not just the only parameter that decides your credibility. Latter is decided just based on your repayment potential, and as such, your salary figures are not considered to grant a loan to you.
The balance of your bank account –
Funds in your savings bank account must not be factored in when considering your credibility, as it doesn’t impact your ability or intention to make loan repayments.
Nationality, gender, race, and religious beliefs –
All such parameters must not be factored in when establishing your credibility as an individual and certainly must not become an essential factor in denying you credit.
Assets –
Assets owned by the individual are not considered at the time of establishing your credibility.
How can you ameliorate your credibility?
Whether or not you are looking to or obtaining credit in the upcoming future, it always is a great idea to come across as credible to any of the potential lenders or investors. As it is said, better safe than sorry. Go through a few of the ways of improving your credibility.
Pay off your dues on time.
As your payment history massively reflects your credibility, it is necessary that you repay all your outstanding dues by the due date. Even if you miss out on a single repayment, it may add negatively to your credibility.
Ensure to optimize your credit utilization ratio
Avoid using up all your credit on your card because it indicates your risk level. Always ensure to keep some balance on your card and repay it by the due date.
Do not apply for a lot of credit cards.
While a single or 2 to 3 credit cards are a must to reveal your credibility, a lot of credit cards have a negative impact on your credit score, particularly if you are not able to repay your dues on time. A lot of credit cards show you are in extreme financial stretches for which you use the credit options to bail you out.
Have a credit portfolio which is diversified
It is crucial to hold a mix of credit in your credit history to form decent credibility. It will show potential lenders that you have the capability of managing different kinds of credit.
Lower your debt
Many times, despite trying a lot, you may end up with massive debt, which may impact your credibility. Thus, to ameliorate your credibility, one of the crucial steps is to have lower debt. For this, ensure to cut down on your expenditures and save maximum so that you use your fund to clear off your debt.
