What Affects Your Credit Score in UAE ?

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A credit score is a powerful number that can impact your major life decisions. It is a financial figure used by lenders to determine your creditworthiness. This aspect is of great importance, as it helps lending institutions ascertain whether there is any risk associated with lending you money. Any lender, be it a credit card company, bank, mortgage banker, or auto dealer, will surely check your credit score before making a decision regarding your loan approval.

The significance of credit scores doesn’t end there with approval or rejection, as it also helps financial institutions decide the amount of money they can let you borrow as well as the interest rate to be charged. Other than this, even landlords, employers, and insurance providers often look into credit scores to check how financially responsible you are as a borrower before letting you rent their apartment, offering a job, or issuing an insurance cover to you.

Finally, even credit card companies examine credit scores before they approve your credit card application. While different firms have different requirements for providing credit cards, the usage of credit scores to decide about their customers is common among them. Generally, all utility companies investigate your credit score before signing you up for a new service. Does all of this seem overwhelmingly complex?

Do you feel like you have to do extensive research in order to figure out what affects your credit score? Fret not! It’s not all that complicated and can be grasped easily in a few minutes. Keep reading to know more about what credit score is and what affects it the most.

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What is Credit Score? 

Credit scores are numbers typically falling in the range of 300 to 850. There are several factors that could impact this score, and lenders are cautious of this number to establish how promising is your ability to repay your debts. As a consequence, these scores play a massive role in whether or not you will get a loan.

Once your financial position changes, it is reflected in your credit scores. You will be at a great advantage if you understand what factors affect your scores, as this ability will allow you to improve them over a period. Both protecting and building your credit are immensely vital these days. Consequently, how you deal with the below-mentioned factors will have a significant impact on keeping your credit scores within a desirable limit.

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What Can Affect Your Credit Score?

Here is what affects credit scores the most in UAE:

  • Bill Payment History
  • Credit Utilization
  • Length of the credit history
  • New credit
  • Types of credit that are in use

Bill Payment History:

When anyone thinks about lending money, perhaps the first aspect they wonder about is whether they will get it back or not. Payment history is among the biggest determinants of your credit score, contributing to 35 per cent of your total credit score. It determines whether you can be trusted to pay your funds back or not, and considers the following factors:

  • Paying late can have a negative impact on your credit score. Thus, to begin with, you should pay all your bills for each account on time.
  • In case of late payment, there is also a question of how late were you? Was it 30 days, or above 90 days? The more you delay your payments, the worse it will prove for your credit scores.
  • If your account has been sent to collections, it is a major red flag to any potential lender as it indicates that you might not possess the capacity to repay.
  • How often do you have such negative events as well as your frequency of missed payments considerably affect your credit score deduction. This means that an individual who missed a credit card payment five years ago, for instance, is perceived as less of a risk than someone who has missed a major payment recently.
  • Certain items on your public records can adversely impact your credit report in front of a lender. These items are: 
    • Debt settlements
    • Lawsuits
    • Public judgement against you
    • Liens
    • Charge offs
    • Bankruptcies 
    • Foreclosure
    • Wage garnishments

Credit Utilization:

This refers to the amount owed by you, and accounts for 30 per cent of the credit scores. FICO, a major analytics software company known for producing consumer credit scores that are used by financial institutions before deciding whether to issue a credit or not, gives considerable weightage to the credit utilisation ratio. This ratio measures the amount of your debt compared to the credit limits available to you. The following factors are taken into consideration by this component:

  • How much of the available credit have you used? This does not imply that one has to have a zero balance account to score high. On the contrary, less is better! It should be kept in mind that owing a bit is better than owing absolutely nothing because this aspect clearly demonstrates to the lenders that you are financially stable and responsible enough to repay the money on time if you borrow some of it.
  • What is the amount owed by you on specific accounts like credit cards, mortgage, instalment accounts, and auto loans? Most credit scoring software prefer to have you possess a mix of credit from different types of accounts. More importantly, they check how responsibly you manage them all.
  • How much is owed by you in total? At the same time, how much is owed by you in comparison to the original limit in the instalment accounts? Here, too, less is better. For instance, if an individual has AED 500 on their credit card with a limit of AED 5,000, they appear far more responsible than individuals owing AED 8,000 on a credit card of with AED 10,000 limit.

Length of the credit history:

Another essential aspect, this contributes about 15 per cent to your credit score. The financial authorities take into account the period for which you have been utilising credit. The number of years you have had the obligations are important. Apart from this, how old is your oldest account and the average age of your accounts is just as important.
Having a long credit history is advantageous as long as it is not marred by any negative events like late payments. Even a short credit history is not bad if you have been regular in making payments and don’t owe much debt.
This is why experts suggest that you leave your credit cards accounts open even if you are not using them anymore. Losing your accounts will immediately cause your credit scores to decline. On the other hand, the age of your accounts will boost your score immensely.

New credit:

This makes up to 10 per cent of your score. The FICO score tends to take into consideration how many recent accounts you have. This includes both the new accounts that you have recently applied for as well as the last time that you opened a new account.
Every time that you apply for a line of credit, lenders make sure to investigate or do a hard pull to cross-check the credit information supplied by you during the underwriting process. If you do not get approved during a hard pull, it can cause a temporary decline in your credit scores. This happens due to the fact that people tend to open multiple new accounts when they have a scarce cash flow or if they decide to borrow more.
Notably, FICO also takes into consideration all the hard inquiries made as well as any new line of credit availed in the past 12 months. It is, therefore, advisable to minimize your applications for new lines of credit in one year. However, it should be noted that this does not include rate shopping, as it implies that they simply rate shopping and are not actually planning to buy a new car or take a new insurance policy. At the same time, avoid excessive searches to keep your credit score unscathed.

Types of credit that are in use:

Making up 10 per cent of your total score, FICO's calculations to determine the credit scores consider the different types of credit acquired like credit cards, instalment loans, mortgages, or store accounts. Having such accounts in the credit report signifies that one has proper experience in managing different types of credit, proving to be better for one’s credit score.
It will be even better if one has availed of loans for several assets like home loans, car loans, credit cards, and so on. These are called installment loans, but not having these is not devastating for credit scores as they form a minuscule part of the total score.
As this is a small part of credit score evaluation, you need not worry if you do not have accounts in these categories. One doesn’t have to necessarily open new accounts or take unnecessary loans just to increase the diversity of credit types.

Different Types of Accounts that Impact Credit Scores

Revolving Credit:

This is generally linked to credit cards, although some home equity debts are also included as revolving credit. These credit accounts offer a credit limit while making a minimum monthly payment based on the amount of credit used. These accounts tend to fluctuate and don’t have a fixed term.

Instalment Credit:

This type of credit consists of loans that allow you to borrow a certain sum of money while agreeing to make monthly payments until the loan is completely paid off. These credits include personal loans, student loans, and mortgages.

Service Account:

These include phone bills and utility bills that are not included in the credit file by default. The only way for a utility account to impact credit scores is if one did not make payments which caused the account to be forwarded to a collection agency.

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Things to be Vary of

Certain aspects of your credit can positively or negatively affect your credit score. The things one needs to be cautious of include -

  • Missed Payments: Even missing your payments by 30 days can heavily impact your score.
  • Too much credit utilisation: As availing of too much credit pushes your credit utilisation ratio higher, it can be a red flag for the creditors. This ratio should ideally lie between the range of 10 per cent and 30 per cent.
  • Applying too much: This can massively hurt your credit scores because every time a creditor will request your credit reports, it will be recorded as a hard inquiry which will be displayed for years on your credit file. An excess of hard inquiries suggests that you are being denied new credit.
  • Account Default: These include bankruptcy, charge-offs, repossession, foreclosure, or settled accounts, and can mar your score for a long time.

Tips to Improve Credit Score

Here is how you can improve your credit score.

  1. Make Timely Payments: Pay your bills and monthly instalments in full and on time, as this helps you maintain a good credit score without any dues pending.
  2. Credit Utilisation Ratio: Reduce your balance on credit cards to bring down the credit utilization ratio.
  3. No Partial Payments: Ensure that you pay all your bills in full and do not carry forward any amount to your next billing cycle.
  4. Credit Inquiries: Limit your requests for new credit to bring down the number of hard inquiries made on your credit report.
  5. No Errors in the Application: If you have supplied incorrect information on your credit application mistakenly, make sure to correct that error. This helps you get your credit card application approved and saves you from getting another negative mark hot on your credit score.
  6. Credit Report: Monitor your credit reports periodically to change the information on the basis of your current circumstances.

In a Nutshell

Credit scores prove vital in getting a loan approved or getting the most favourable interest rates. However, one need not obsess over them in the expectations of an ideal score that will get you brownie points from the lenders. As long as you manage your credit with some discipline, your score will be credit-worthy.

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