A few weeks back, we discussed why a credit card is important and how it affects your personal finance. We found most people are applying for credit cards to build and maintain a good credit score.
So, let’s discuss credit score in more detail and dive deep into the factors affecting the credit score.
Estimated read time: 3 minutes and 7 seconds
Buckle up, here we go!
For beginners, a credit score is a three-digit score that measures your trustworthiness to pay back loans. It ranges from 300 to 900. A rating agency evaluates your credit history and allots a score.
Lenders usually consider a score above 750 as good. Having a good credit score helps in obtaining quick approval for loans and better interest rates.
And the problem everyone is dealing with is that most people don’t give this much importance until they attempt to take out a loan for a home, auto, education, etc.
Also, they don’t know about the things affecting their credit score. It is crucial to understand these factors to build and maintain a good credit score.
New to credit? Don’t have any credit score yet?
If you don’t have any credit score yet, acquiring initial credit is the most challenging part. You can try taking a secured credit card with fixed deposits or a secured loan with collateral. Try saving a good portion of your income in your bank account. This might help the lender in accessing your creditworthiness. Or the bank might call you for a pre-approved credit card.
Also, remember credit score is calculated differently by different credit bureaus or agencies. In India, we have four credit bureaus: TransUnion CIBIL, Equifax Credit Score, Experian Credit Score and CRIF Highmark Credit Score. Don’t worry if they provide a slightly different credit score for you.
5 Factors affecting your credit score
1. Payment history
35% of your credit score is calculated based on your payment history. Your payment history shows how timely you have made the payments, how many times you missed on the payments or how many days past the due date you paid your bills. So you can score high if you have paid your dues on time. Make sure you never miss out on payments, as this would leave a negative impact on your score.
2. Amount owed
About 30% of your credit score depends upon how much you owe on loans and credit cards. If you have a high balance and have reached the limit of your credit card, then this would lead to a drop in your credit score. Never spend over 30% of your credit card limit.
3. Credit history length
The length of your credit history is accountable for 15% of your credit score. If you own a credit card for a long time or have taken a loan long back, then you will have a higher credit score. So never deactivate a credit card. Keep using it here and there for small purchases.
4. Credit mix
Different types of loan mix account for 10% of your credit score. Having a combination of various loans, like instalment loans, home loans, and credit cards, helps increase your credit score.
5. New credit
10% accounts for your recent credit activities. Credit activity includes all the information regarding opening or applying for various accounts, types of loans you applied for and credit limit usage. Applying for too many credit cards and loans can affect your credit score.
Remember, it may take up to four to six months for your credit score to change. So, don’t be disappointed if you don’t see any results instantly.
The reason for the delay is that information on new bank accounts or credit card payments can take a long time to reach the credit bureaus.
Essential rules to follow to build and maintain a good credit score
- Pay all your credit card dues and EMIs on time
- Avoid paying the minimum due instead pay the full amount
- Never let your credit limit utilisation go over 30%
- Keep your EMI to income ratio under 40%
- Never withdraw cash from your credit card
- Don’t deactivate your old credit card
- Don’t apply for too many credit cards or loans at the same time
- Keeping analysing your credit score once every 3 to 6 months
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