A credit score is a measure of an individual’s ability to repay the borrowed amount. It is the numerical representation of their creditworthiness. A credit score is a 3-digit number that falls in the range of 300-900, 900 being the highest. Generally, a credit score of 750 and above is considered as ideal by a majority of lenders. You should always work towards reaching a credit score that is close to 900. A higher credit score offers you several benefits and helps you at the time of getting a loan or a credit card. Having a low credit score suggests you have not been a responsible borrower and have been slacking off repaying the borrowed sum.
Who calculates credit scores?
Credit scores are calculated by the credit bureaus in the country after taking into consideration several factors like the length of your credit history, repayment records, credit inquiries, among others. When you apply for a loan or a credit card, lenders like banks and non-banking finance companies (NBFC) check your credit score to see whether you have the ability to repay the borrowed sum. If you have a higher credit score, you are entitled to receive preferential pricing and get discounts on the interest rate. Moreover, a high credit score gives you the additional power to negotiate for better rates of interest on loans. There are several factors that can affect your credit score. Let’s take a look at them in detail:
1. Your repayment history: If you have paid all your bills and loan payments on time, it will help you maintain a high credit score. One of the biggest factors that affect your credit score is your repayment history. It accounts for 35% of your credit score. Making bill payments on time should be your utmost priority as late payment of bills hampers your credit score. Avoid delaying your bills or EMI payments as it reflects badly on your credit score.
2. Age of your credit history: Another important factor is the length of your credit history. A long credit history gives lenders and banks a better opportunity to check your repayment activity and financial health. By using your credit card consistently over the years and taking a small personal loan you can start building a credit history.
3. Not using credit cards: When you don’t use a credit card, you are not able to build a credit history. Having no credit history decreases your chances of getting approval for a loan as the lenders can take a better decision once they take a look at your past credit transactions. Less or no credit transactions shows an individual’s credit file as inactive.
4. Total number of hard enquiries: Each time you inquire about a loan or credit card, an inquiry is placed on your credit report. Such inquiries are called hard inquiries. Multiple hard inquiries will bring your credit score down. Credit inquiries account for 10% of your total credit score. If you have several hard enquiries without any loan approvals, it suggests that you have approached various lenders in need of credit. This makes you look as credit hungry and lender may not want to offer your credit in form of loan or credit card.
5. Not checking credit report periodically: A credit report offers you detailed information about your credit accounts and about the total debts that you have to clear off. If you are not checking your credit report from time-to-time, you might not know if there are any errors. A wrong entry of a credit account or a possible identity theft can take a toll on your credit score.
6. Good balance of credit mix: There are two types of debts - secured and unsecured. It will boost your credit score if you have a healthy mix of both the type of debts. This essentially means it is good to have a car or home loan as well as a credit card. The type of your debt accounts for 10% of your total credit score. When you have a good balance of mixed credit in your credit report, the lenders will know that you have experience in handling both the type of credits.
7. High credit exposure: The total amount due accounts for 30% of your credit score. One of the easiest ways to maintain a low credit utilisation ratio is to pay the full amount of all your bills/EMIs. Maintaining a lower the credit utilisation suggests that you are using the credit in a responsible manner. One of the fastest ways to maintain a low credit utilisation ratio is to request a higher credit limit on your credit card.
8. Opening multiple credit accounts at the same time: You should be extra careful and make sure not to open multiple credit accounts at the same time. Instead, you can apply for credit at decent intervals. Each time you inquire about a loan or credit card, an inquiry is placed on your credit report. Such inquiries are called hard inquiries. Multiple hard inquiries will bring your credit score down. Credit inquiries account for 10% of your total credit score. Also, frequent credit inquiries make you look credit hungry and thereby affect your credit or loan application.
9. Debt settlement: There are several people who are unable to pay debts and it reflects poorly on the credit score. Your credit score may also take a hit if you settle your debt. If your credit score reduces, it will hamper your loan application approval. Some of the banks don’t consider individuals who reject the loan request from such individuals completely.
If you keep all the above points in mind, you will be able to increase your credit score and be eligible to get loan or credit cards. It must be noted that building a credit score is a slow process and you will not get results overnight. You need to be consistent in your repayments in order to maintain a healthy credit score.
Deepti Financial Expert