Credit score is a 3 digit number which provides a lender with an idea regarding the lending risk and credibility of a prospective borrower. Your credit score acts as a snapshot of how well you have previously handled debts and your likelihood of repaying future loans. In India the 3 digit credit score ranges between 300 and 900. The higher your credit score is, the better you look to potential lenders as a prospective borrower. Your score can thus have an impact not only on your chances of being approved for new credit but may also lead to reduced interest rates on your new loan. The following are the key factors that are taken into consideration when calculating your credit score.
Repayment Record/Credit History
According to experts this is the single most important component of your credit score. Your credit report contains your repayment track record which forms of basis of whether you can be trusted to repay the money that is lent to you in the future. The standard repayment record featured in your credit report includes information regarding timely payments, late payments, debt settlements and also loan defaults. If you have defaulted on any of credit card dues or loans in the past, then it would cause your credit score to drop significantly. On the other hand, timely payments would help you improve your credit score over time.
The second most important factor affecting your credit score is how much you owe to your lenders. A prospective lender checks your available credit limit as well as the ratio of your credit balance to credit limit (also known as credit utilisation ratio). A high credit utilisation ratio is considered negative by the credit bureaus as it increases the chance of default. Lenders prefer to lend money to responsible and financially stable borrowers who have better chances of paying back the borrowed money.
Your credit score also depends upon your loan portfolio i.e. how many unsecured and secured loans you have taken. Secured loans such as auto loan and home loan feature the car and house as collateral respectively. Whereas, unsecured loans such as personal loans and credit cards are not backed by any kind of security or collateral. Any default or delayed re-payments would affect your credit score. Borrowers who have a balance of revolving credits and secured loans that are paid back on time tend to have a higher credit score than those who only have unsecured debt.
Age of Credit History
The credit score calculation also takes into account the age of your credit history i.e. how long you have been using credit instruments such as credit cards and loans. Prospective lenders check your oldest accounts and the average age of all your existing accounts. A longer history is better if it is not marred with late payments and defaults. This is because it shows you’ve been handling credit from a longer time period in a disciplined manner, which increases your credibility in the eyes of prospective lenders.
Maintaining a good credit score is really important in the present scenario as it helps you get approved for loans faster and often at lower interest rates. To ensure you credit score stays closer to 900, pay your credit card dues and loan EMIs on time, maintain your overall credit card debt at 30% or less of available credit limit and don’t apply for new credit unnecessarily. To get more ideas regarding how to maintain a high credit score and get your free credit report today from Paisabazaar.com.