When you apply for a loan or credit card, the lender requests your credit report from a credit bureau. Apart from your credit score, the lender analyses your detailed credit report to assess the risk of approving your credit application. This is done especially in the case of unsecured credit, such as personal loans or credit cards, where the risk of approving credit is higher due to a lack of collateral.
A high credit score implies that you have handled credit smartly in the past and thus pose less risk of default. However, there may be instances when you have a good credit score but your credit report has hidden reasons that, if the lender sees, may become the reason for your loan rejection. Let us delve deep and try to understand the 5 most important factors that lenders check in your credit report to assess your creditworthiness.
1. Repayment History
This is the first and the most important thing that a lender sees in your credit report. All repayments made by you in the past 36 months for each account are mentioned in the DPD section of the credit report. DPD above 90 is considered fatal, and no lender would approve your credit application if you have multiple DPDs.
Here, the best scenario is having zero DPDs against all repayment months for all credit accounts. Zero DPDs against all 36 months show that you have been disciplined in repaying your dues and thus pose less risk for default.
Check all your DPDs and ensure you don’t have a default. Even if you have one or two, try not to miss payments frequently; otherwise, your score will fall significantly and the lender will also not approve your credit application.
Also Read: How Long Does Negative Information Stay on CIBIL
2. Account Status of All Credit Accounts
All lenders watch this section closely to figure out defaults in the past. A default can stay in your credit account for up to 7 years. In case you have defaulted on your loan, settled your credit account or have restructured the loan or credit card repayment, the lender may get cautious while approving your credit application as the risk of default is high.
In case you have settled an account in the past, but have started repaying all dues diligently after that, you may see a slight increase in your credit score. However, lenders might reject your application citing this reason.
The best scenario here is closing all loan accounts and credit cards. Do not settle your credit account and repay any dues, and then close the defaulted account. Go for settlement only as a last resort.
Read in Detail: Why should you not Settle a Credit Account
3. Recent Credit Enquiries
You should refrain from multiple credit enquiries in a short period. Too many enquiries in a short span show your hunger and desperation for credit. Lenders take it as a negative sign. Lenders also take a close look at whether the loans or credit cards you applied for were approved or not. Your personal loan application may not get approved if you have taken a high-ticket loan recently.
Ideally, you should do proper research, compare loans or credit cards from various lenders and apply only for the one that not only suits your requirements the best but also has a high chance of approval.
4. Credit Utilisation Ratio
Credit Utilisation Ratio or CUR is the ratio of total credit utilised by you out of the total available credit limit against all credit cards. A high CUR signifies that you are highly dependent on credit and pose a high risk of default in case a financial emergency occurs. Maxing out your credit cards and having high CUR regularly can lower your score and also pose a red flag for the lender.
Credit experts suggest keeping this ratio low. A CUR of 30% or less is preferred by lenders. Having a high CUR for a month and then lowering it may impact your credit score only temporarily. However, if you repay all dues in time, your credit score may not be impacted.
It is also worth noting that no lender would reject your loan or credit card application just because you have a high CUR for one or two months.
5. Length of Credit History
The lender also checks your overall length of credit history. A longer credit age provides more information to the lender regarding your credit history. It helps the lender to assess your credit behaviour for a longer period.
You should refrain from closing your oldest active credit account and keep it active if you have followed a disciplined credit behaviour. The longer the duration, the better it is considered for a healthier credit score.
You can find all these details in your Credit Health Report provided by Paisabazaar. Checking this report regularly can help you stay updated with your creditworthiness and take necessary actions as recommended in the report to stay eligible for the best credit offers in future.
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