You must have heard about credit reports — it is a common thing to find on investment apps and lending platforms. A report that summarises all the information regarding your credit history, based on which your credit score is calculated by credit bureaus, understanding what it means is key to good credit health. Radhika Binani, chief product officer at Paisabazaar, writes about the five crucial points to look out for in your monthly credit report.
If you don’t already realise this, the more quickly you get onboard, the better — your credit report is important. Whenever you apply for a loan or credit card, the lender fetches your report from bureaus to assess your repayment behaviour and creditworthiness and decide whether to approve or reject your application. Earlier, this report was not available to retail customers and one might have needed to pay a fee. But now, most platforms have made it free and you can receive your report every month.
It’s therefore important to understand its crucial aspects to get a fair idea about your financial health and credit repayment behaviour.
These are the five things you need to know about your credit report
Credit account details
All your active and recently closed credit accounts are listed under this section of the credit report. This information is used by lenders while determining your creditworthiness. Make sure your loan and credit card account details are updated and captured accurately. Any form of incorrect information or error on part of the lender or credit bureau can harm your credit score, thereby impacting your future loan and credit card eligibility as well.
Credit repayment details
The report also captures detailed repayment history of your active credit cards and loan accounts, clearly listing whether you have timely repaid them or not. This information is used by lenders to assess and predict your credit repayment behaviour in the future. Therefore, it is vital to check whether your missed, late or partial payments (if any) are accurately listed in your credit report. Any inaccuracy in such information can lower your credit score.
Credit card utilisation
Credit Utilisation Ratio is one of the crucial parameters factored in by credit bureaus while calculating your credit score. This refers to the ratio of credit limit utilised by you, against the total credit limit available on your credit card.
For example, if you have two credit cards with credit limits of Rs 50,000 and Rs 75,000, and the outstanding balances on them are Rs 10, 000 and Rs 20, 000, respectively, your credit utilisation ratio for that month is 24%.
As lenders generally prefer sanctioning loans to those with credit utilisation ratio within 30%, anything above 30% can reflect credit hunger and more possibility of default in future. If you frequently breach the 30% mark, consider requesting your credit card issuer to increase your credit limit, or apply for another credit card. Doing so would increase your credit limit, thereby reducing your credit utilization ratio, provided you do not increase your credit card spends.
Information such as the name of the lender, date of the application, type of credit, i.e. loan or credit card amount, etc. is mentioned in this section of your credit report. Whenever you apply for a loan or credit card, the lender requests the credit bureau to fetch your credit report. Such lender initiated requests are termed as ‘hard enquiry’, each of which gets listed in your credit report, and pulls down your credit score by a few points.
Submitting multiple hard inquiries to lenders, especially within a short span of time, can prove to be more harmful to your credit score. Hence, it’s prudent to avoid multiple hard enquiries and instead, compare various credit options and lenders on online financial marketplaces and choose the suitable one basis your eligibility criterion and financial requirements. Enquiries submitted by such platforms are termed as ‘soft enquiries’, which are self-initiated enquiries. These neither get listed in your credit report nor harm your credit score.
Also, while looking at your credit report, make sure there are no unknown or multiple credit report enquiries listed, as these can harm your credit score, thereby reducing your credit eligibility and approval chances in the future.
Given that lenders check your credit report while evaluating your loan or credit card application, any mismatch in personal information in your report and that mentioned in your credit application can lead to rejection of your application.
What if you spot an error or misinformation in your credit report?
Any incorrect information or error in your credit report, such as unknown credit enquiries, can pull down your credit score. Such misinformation may even be a sign of fraudulent activity in your name. Once you spot an error, immediately contact the concerned credit bureau and lender and get it rectified as soon as possible.
Make it a habit to check your report periodically, ideally at least once in every three months. Doing so would help you spot such errors and get them rectified quickly, hence preventing further damage to your credit score. While consumers can fetch one free report every year from all four credit bureaus in our country [CIBIL, CRIF High Mark, Equifax, and Experian], they can alternatively fetch free credit reports every month along with their free updates from online financial marketplaces [like Paisabazaar, BankBazaar, Indialends].
All images: Courtesy Getty