The Credit profile of an individual or a company is a really important aspect of your financial reputation. When you apply for a loan, the lenders check your credit history along with your entire information including your work, assets, and all your debt records before you can obtain a loan from them. Your credit report serves as a record of your credit availability as well as your credit usage in the past.
All lenders and organisations which extend credit check a person’s creditworthiness through their credit records.
Did you know? An individual with a good credit record has better chances of obtaining a loan as compared to the one with a poor credit history.
What is Credit Profile Risk?
Apart from lenders, even landlords, companies and others who may be interested in a person’s credit history tend to check their credit profiles. Maintaining a healthy credit profile is important to maintain an excellent financial image.
5 Cs of credit are mentioned below:
1. Character-
In case of a personal loan, it is important that the borrower have a good credit history. Character refers to the reputation and dependability of a firm's management about commercial creditors; if a company is a private corporation, the character also includes ownership.
2. Capacity-
The ability of a borrower to acquire and repay debt is referred to as capacity. A borrower's capacity is assessed based on a variety of debt service and coverage ratios for both retail and commercial borrowers. Understanding the borrower's competitive edge is important for commercial lenders since it will affect their ability to create future cash flow. The borrower's ability to preserve or expand this advantage is crucial.
3. Capital-
The overall wealth owned by an individual is described as their capital. Lenders will try to figure out how much debt and equity sustain the borrower's asset base. Knowing whether a borrower can obtain alternative funding from other sources is crucial.
4. Collateral-
The collateral security the borrower provides plays an important role in the lending process. It decides the amount of credit risk. This may include the valuation of assets, their location, and the ease of transferring the title, which may be crucial.
5. Conditions-
This mostly refers to the goal of credit and external factors that may be outside the borrower's control and may present dangers or opportunities. They may consist of political, macroeconomic, or economic cycle-related variables. Conditions for business borrowers include issues unique to the industry and societal or technological advancements that could impact competitive advantage.
Also Read: Steps To Correct Credit Information Report (CIR) Mistakes
Steps To Protect One’s Credit Profile
It is really important to maintain a healthy credit score. The most important way to achieve this is by being proactive and keeping your credit profile secure. You must practice good financial habits like paying your bills on time, repaying past debts regularly, etc.
The following ways can help you protect your financial image:
1. Conduct Regular Reviews Financial Accounts
Check all of your accounting information for suspicious activity and review them regularly.
Make it a habit to regularly check your:
- Account statements
- Credit card statements
- Credit reports
- Log into your financial institution's online portal to view your bank and credit card statements.
- Accessing your credit history is simple, but you must go to a separate site.
2. Freeze Your Credit
When someone applies for a new line of credit, the creditor orders a credit inquiry to ensure that the applicant's credit health is good. This grants the lender permission to see the credit report to review the applicant's application. When identity theft occurs, thieves may attempt to open entirely new credit lines in the names of their victims.
This allows them to go undiscovered for a longer duration and less likely to notice a new line of credit than unauthorised charges on an existing one. To prevent thieves from opening unauthorised lines of credit, place a security freeze on new credit inquiries. A would-be thief must conduct an unauthorised credit inquiry to open a new line of credit.
3. Install Fraud Alert Credit Report
When you apply for a fraud alert service, a fraud alert appears on your credit report, alerting potential creditors that you have been the victim of identity theft. This instructs them to notify you before opening an account in your name to obtain additional identification. Unlike credit locks and freezes, fraud alerts do not prevent lenders from viewing your credit report. This is both good and bad because it means they don't fully protect you, but it also means they are more convenient because you don't have to eliminate the alert every time you apply for credit.
4. Use Multi-Factor Authentication
Setting up additional security on online accounts may seem excessive, but amplified security features are frequently the only barrier between authorised and unauthorised activity. Multifactor ID systems use layered authentication requests to reinforce account security by asking a user to provide something only the user knows.
Also Read: This is What You Should Know about CIBIL Score
5. Establish Good Credit-Building Habits
Safeguarding your credit score is about more than just avoiding identity theft. It also necessitates the maintenance of good credit-building habits so that you do not inadvertently harm your credit.
Make certain that you do the following:
- Pay your bills on time: Your credit account payment history is the most significant factor contributing to your credit score. It is critical to always pay your bills timely, as even a single late payment can be disastrous to your credit.
- Maintain low balances: A lot of existing debt and a large debt-to-credit ratio is bad for your credit. Keep your credit card balances as low as possible to improve your credit score. Keep your old credit cards open: While closing old, unused credit cards may seem like a good idea, it's safer to keep them open (unless they have high annual fees).
Each card you have added to your total available credit raises your credit score. Apply for new credit only when necessary: Applying for new credit should be done with caution. Every application you submit will result in a credit check.
6. Register in a Credit Monitoring Service
All three credit bureaus provide credit monitoring services, which alert you to any unusual or new credit activity, such as transactions or accounts opened in your name. These services keep you up to date at all times. The price varies depending on the service you select.
7. Filter Personal Data
Personal information like your date of birth and bank account information are vulnerable to exploitation, so avoid providing it to unauthorised sites. Also, when disposing of hard copies of your PAN and Aadhar cards, bank statements or invoices, shred them to prevent any printed information from being combined with other information.
Also Read: Know All About your CIBIL Score and Report
Conclusion
Your credit profile significantly impacts your financial well-being because it determines your ability to borrow, finance large purchases, and find a place to live. Use these tips to protect yourself, your finances, and your credit so you can focus on what matters. The ultimate peace may be achieved by using the above information to safeguard your credit and enjoy a safe and secure life.
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