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  • Factors Deciding Your Credit Score

    A good credit score is the key to get quicker approvals for your loan or credit card applications. It is a crucial factor that helps banks and non-banking finance companies (NBFC) decide whether or not you are in a position to repay the loan. A credit score is a numeric summary that is derived from your loan repayment behaviour. It represents your credit worthiness and higher the credit score, better the chances of you getting a loan. Hence, maintaining a healthy credit score is of utmost importance. Here are some of the top factors that affect your credit score.

    Factors which affect your credit score

    Some of the few points which actually impact your credit score are mentioned below.

    • Repayment History : Your repayment history is one of the key factors that decides your credit score. It accounts for almost 35% of your total credit score. Hence, it is extremely important that you pay all your bills on time and have a consistent payment record. You should never default on your bill payments as it will have a negative effect on your credit score. Late payments also get marked down on your credit report. Make sure to pay your bills every month to improve and maintain your credit score. If you do not have a good repayment history, banks and NBFCs will consider you incapable of handling credit.
    • Amount of debt : The amount of debt on you accounts for 30% of total credit score. Always be aware of your current status of wealth and take only that amount of credit that you can repay. Taking excess credit that you clearly won’t be able to afford shows that you are credit-hungry. Maintain a low credit utilisation ratio which is basically the total balance you owe and your total credit limit on all your accounts. You should ideally use 30% or less of your credit limit. Having higher debt can bring down your credit score. It must be noted that you can pay off your debt at any point of time. Focus on minimizing your debt as it will help in increasing your credit score.
    • Age of credit history : The age or length of your credit history accounts for 15% of your total credit score. Age of credit history is the number of years that have passed since you opened your first credit account. Credit bureaus like CIBIL consider the average number of years for which you have been holding a credit account. Moreover, it also takes into consideration the number of years that have passed since you opened your first credit card account. Having a decent credit age is better for your credit score as it shows that you have a lot of experience in handling credit.
    • Type of debt : Debt is classified into secured and unsecured. It will help you 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. Varying the loans you take will also positively impact the credit score. This indicates that you have a decent experience in handling different types of accounts. The type of your debt accounts for 10% of your total credit score.
    • Credit inquiries : The number of applications an individual makes to avail credit are reflected on the credit score. Each time you enquire about a loan or credit card, an inquiry is placed on your credit report. Additional requests reflect poorly on the Credit score as they make you seem credit greedy. Credit inquiries account for 10% of your total credit score.

    Myths related to your credit score

    There are certain additional details which banks or financial institutions require during credit applications but which have no role in determining the credit score. Here are some points which, while important have no bearing on your credit score.

    • Age – Your age might seem like an important criteria when obtaining a loan/credit but it has no bearing on your credit score. While it is mentioned in the report it is just an identifier and does not affect the score in any way.
    • Bank account details – Your bank accounts and investment portfolio have no impact on credit score even though they offer great financial insight.
    • Address – Your home/business address goes a long way in deciding your social status but plays no role in your credit score. It is merely used for informational purposes.
    • Interest rates – We often jostle to get loans at lower interest rates, thinking that lower interest rates might translate into better scores. This, however is not true, as the interest rate has no impact on your credit score.
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