7 Things You Didn’t Know Affects Your Credit Score

A credit score allows lenders to measure a consumer’s creditworthiness. It helps them take a decision on whether to offer them a loan or approve their credit card application. You should take your credit score seriously as it has a direct impact on your financial life. It is a good habit to check and review your credit score and report from time-to-time, as it gives you an idea of your financial health.

What is a credit score?

A credit score is a numerical representation of your financial health in terms of creditworthiness. If you want to get a loan or a credit card, the first thing lenders like banks and non banking finance companies (NBFC) check is your credit score. It helps lenders predict whether the chances of you turning into a defaulter. A credit score ranges between 300-900. The closer your credit score is to 900, better the chances of getting a loan or a credit card with better benefits and interest rate. Generally, a credit score of 750 and above is considered as ideal by the majority of banks and non- banking finance companies. If you have a CIBIL score higher than 750, lenders are willing to offer preferential pricing when it comes to interest rates on loans and credit card benefits.

There are several factors that affect your credit score. Let’s take a look at some of them:

1. Not paying bills/EMIs on time: The biggest factor that hampers your credit score is your repayment history as it accounts for 35% of your credit score. Paying all your bills and EMIs on time helps your credit score in a long way. It must be noted that even if you close an old account, not clearing the payment will still hamper your credit score. You should make it a priority to
2. Removing/Deleting old credit accounts: Removing old credit accounts should be avoided at all times. Your old credit accounts could still have an excellent credit history and deleting the accounts will automatically reduce your credit history. It becomes easier for the lenders to take a look at your credit history and calculate your creditworthiness. Therefore, experts suggest that you should keep your credit accounts open as long as possible to give your credit score a boost.
3. Maintaining a high credit utilisation ratio: This is another important factor that affects your credit score, however, most of the users are not aware of it. Credit utilisation refers to the ratio of your credit card balances to your credit limit. In order to maintain your credit score, you should keep a tab on your credit utilisation ratio. Ideally, you should spend only 30%-40% of your credit card limit. If you have a higher credit utilisation ratio, it will have a negative impact on your credit score. A higher credit utilisation ratio suggests you have been increasing your debt and projects you as credit hungry. Having a high balance on your credit card can hamper your credit score
4. Not having a credit history: The age of your credit history is another factor that can influence your credit score. It accounts for 15% of your total credit score. The longer the credit history, better the chances of you getting a quicker approval on your loan or credit card application. If you have a longer credit history, it indicates that you have been handling credit for years and therefore lenders can trust you with a loan. You should avoid opening several credit accounts at once and instead plan them in equal intervals.
5. Not checking credit report regularly: Error in credit reports are common and this is one of the common reasons your credit score could be low. Credit reports can have errors related to your EMIs or bill payments. Therefore, if you check your credit report from time-to-time, you will come across the errors at the earliest and thereby dispute them. In addition, if you review your credit report periodically, you get a fair understanding of your financial status. As per the mandate from the RBI, credit bureaus have to offer one free credit report to individuals in one calendar year. Moreover, you can check your credit report and credit score from several fintech companies like BankBazaar for free.
6. Maintaining a good balance of different credit: A good balance of secure and unsecured credit helps you boost your credit score. A secured loan is a loan given out by lenders against an asset which is used as collateral or security for the loan. Generally, assets like house, gold, and others are kept as collateral against your loan amount that corresponds to the asset’s value. On the other hand, an unsecured loan is wherein you don’t have to keep any of your assets as collateral. Loan against property and car loan are examples of secured loan while credit card, personal loans are examples of unsecured loan. When you have a good balance of secured as well as unsecured loans, it suggests that you are capable of handling both types of credits.
7. Multiple loan enquiries: If you have multiple credit cards and a good balance of loans, you should avoid making continuous credit enquiries. Such credit hungry behaviour gets noticed by lenders and they will not be willing to offer you credit or approve your application. Each time you apply for a loan or credit, you trigger an enquiry from banks or NBFC to check your credit score. Such enquiries made by lenders are called as hard enquiries and they bring down your credit score.

In addition to all the above factors, your credit history should also have a good balance secured as well as unsecured credit. At the time of calculating your credit score, credit bureaus look at how many credit cards and instalment loans you have. It also checks whether all your credit is the same kind. Therefore, it is better to have both types of credit as it helps lenders to take a sound decision.