Credit reports are crucial for loan, credit cards approval: 5 things you must check in your report

Credit reports play a crucial role in an individual's financial life. Apart from influencing loan and credit card approvals, these are being increasingly used for fixing loan rates and providing attractive pre-approved loan and credit card offers. What's more, these may soon be used to set insurance premium rates, post-paid limits and utility rates. Even employers have started looking at credit reports of prospective job candidates as their credit behaviour reflects their financial outlook and lifestyle. All these factors make it crucial to check your credit reports at regular intervals.

Obtaining your credit report has become quite easy with some online marketplaces offering them for free. Once you receive your credit report, thoroughly check all the details as there can be errors in your credit and personal details and these may affect you in the future. For instance, if your name is misspelt in the credit report, it may lead to rejection of your personal loan application when you require funds urgently. Here are the five things to look out for in the credit report-

Confirm the credit report enquiries: The credit report enquiries section lists all recent soft and hard enquiries. Soft enquiries mean your self-initiated credit report requests or those requested by lenders to judge your eligibility for pre-approved cards/loans. These enquiries are not visible to lenders and thus, are not considered while calculating your credit score or judging your loan eligibility. Hard enquiries refer to the credit report requests raised by lenders/credit card issuers when you initiate a loan or credit card application.

Why check: Hard enquiries reduce your credit score and too many of them within a short period are interpreted by lenders as a sign of credit hungriness. It is, therefore, critical that you should not approach too many lenders or credit card issuers within a short period. Instead, avail the services of online loan aggregators to compare various credit card and loan offers available as per your requirement. If you find an unknown hard enquiry in your report, it can be due to a possible error on the part of the bureau/lender or a case of identity theft or fraud.

What to do in case of an error: Contact the credit bureau or the named lender/card issuer. If you still do not recognise the hard enquiry, raise a dispute with the credit bureau.

Check the credit account details: Your credit report should list all your active and recently closed credit accounts, including your credit cards. Closed credit accounts, which are up to five years old, may be included in your credit report.

Why check: Your credit accounts play a major role in determining your credit score. Even the nature of your credit accounts or the credit mix contributes to your credit score. For example, secured lenders prefer lending to borrowers with higher proportion of secured loans, and the absence of any active secured loan will negate a higher score. Similarly, an unrecognised credit account with a string of missed or late payments will pull down your credit score. Moreover, this can also be a sign of fraud or identity theft.

What to do: Check whether your report contains all active credit accounts. Contact the lender or bureau if you detect any missing credit account. Raise a dispute as soon as you find unrecognised credit account(s) in your report. It can be the result of identity theft.

Check your loan repayment details: Credit reports contain detailed credit repayment history of a borrower. This will include all timely payments as well as all late and part payments.

Why check: Your loan and credit card repayment history contributes the most to your credit score. Lenders study your past repayments to understand how often you have paid your dues by due date and whether those repayments were in part or full. They use this analysis to predict your future credit behaviour on the basis of which they approve your loan or credit card application. Thus, any missed or wrong information may significantly affect your credit score and future loan eligibility.

What to do: Match your repayment history with the records in your credit report, especially the details of missed, part and late repayments. Contact your lender or credit bureau to make necessary corrections.
 
Check your personal details: Your credit report lists your personal data such as name, mobile number, PAN and other communication details mentioned in each of the credit facilities.

Why check: Checking your personal details will help you confirm whether the banks have incorporated the changes, if any, requested by you. Moreover, as lenders go through your credit report before approving your credit application, a mismatch in the information mentioned in your credit report and credit application may lead them to reject your application.

What to do: First, contact your lenders to correct the wrong or outdated entries listed in the personal details section. Raise a dispute with the bureau if those have been caused by clerical errors on the bureau's part.
 
Find out your credit utilisation ratio: This is the ratio of total credit card outstanding against total credit limit available on your credit card/s. For instance, if you have two credit cards with credit limits of Rs 100,000 and Rs 80,000, and outstanding balances of Rs 17,000 and Rs 10,000, respectively, your credit utilisation ratio for that month is 15 per cent.

Why check: Credit utilisation ratio is one of the major contributing factors to your credit score. Lenders prefer to lend to borrowers with credit utilisation ratio of less than 30-40 per cent. A borrower with higher credit utilisation ratio is considered credit-hungry, hence more likely to default.

What to do: Try to keep your credit utilisation ratio within 30-40 per cent. Increase your credit limit or apply for additional credit cards if your utilisation ratio regularly exceeds 40 per cent of your total credit limit.
 
Regular checks and analysis of your credit report will not only help you identify errors or identify theft that may have taken place, but also enables you to understand the factors that determine your credit score and take steps to make it stronger.

Radhika Binani is Chief Products Officer, Paisabazaar.com