How Good and Bad Credit Affects the Credit Score?

Credit is an integral part of life today in the form of rolling credit when we swipe our credit cards or in the form on various loans that we may take from time to time. Gone are the days when credit was supposed to be a bad thing. Earlier generations shied away from taking loans and borrowing was frowned upon. This is changed in the past few decades, now loans are no longer a dirty word; getting loans is simpler, and there are multiple avenues available for people who are seeking credit. Credit per se is not bad and any stigma that may have been attached to it has been removed in the last few years but the way the borrower treats credit makes it good or bad. 

Is Credit Good or Bad?

As stated above the way credit is treated makes it good or bad and there is no good credit or bad credit per se. So how does the borrower’s treatment make credit good or bad?

All loans are extended with an understanding that the borrower will repay then in a timely fashion as per the agreed terms and conditions. This essentially means that the borrower needs to pay the EMIs on time every month and in case of credit cards pay the amount due on or before the due date. Not doing so means that the borrower has defaulted on the payment thus apart from attracting a penalty charges and interest there is a negative impact on the credit score too. Repayment history is the biggest contributor to the score calculation and all delays in paying EMIs and credit card dues are reported to the rating agency thereby affecting the credit score negatively for a considerable time.

Everyone must regularly access their credit report to understand what impacts their credit rating and how. You can get free CIBIL score also if you want to assess your credit health and improve on it if so required.  So if you have a loan and you continue to make payments on time regularly you get a healthy credit history which makes your credit score strong. A loan that is serviced well and has run its full course is good credit as it impacts the score positively.

Credit card usage also impacts the credit score. So if the credit card usage on an average remains below 30% of the limit sanctioned and the dues are paid on time it becomes “good credit” which strengthens the credit score. If the usage is mostly more than 30% of the sanctioned limit, even if bills are paid on time it does not bode well for the credit rating and hence it becomes “bad credit”. Missing or delaying payments is a sure shot way of spoiling the credit rating. 

Low credit scores are not a good sign. They indicate sloppy and risky credit behavior and poor credit discipline. Getting a loan with low CIBIL score is definitely a challenge and in some cases it could compromise the job prospects an individual too as some organization may not be willing to hire those with a poor credit history.

Does the type of loan also impact the Credit Score?

Loans may be categorized as secured or unsecured based on the fact whether they have some collateral backing them or not. Secured loans are backed by an asset as in the case of a home or auto loan while unsecured loans have no collateral. Personal loans and credit card borrowings can be categorized as unsecured loans.

A balanced credit report which has both secured and unsecured loans is better for the rating. If an individual has only unsecured loans then his CIBIL score may be affected adversely as he/she becomes a high risk candidate for extending any further credit. Thus only unsecured loans in the CIR could have some negative impact on the score calculation as it is one of the five factors that are taken into account when a CIBIL score is calculated.

So while no credit is good or bad too much dependence on unsecured loans could be a bad sign for the credit score. However all loans if treated responsibly can create a good trail which can help one get a good credit score. So be careful with your payments and do not be overly dependent on unsecured credit to make your credit “good”.