Your credit score depends on a lot of factors that a credit bureau or Credit Information Companies (CICs) takes into consideration while calculating your CIBIL score. These factors depict your past credit behavior and are reported to Banks and NBFCs, every time you apply for a fresh credit product.
5 Factors that Affect your Credit Score
Some of the key factors that influence your credit score are:
1. Loan Repayment History: Timely payments can boost your credit score and help in improving it significantly. Defaulting on your EMIs or making late payments negatively affects your CIBIL score. Your loan repayment history has a high impact on your CIBIL score calculation.
2. Duration of Credit History: The duration or age of your credit history also affects your credit score. If you have used credit cards/loans for a long period and made timely payments on them, then it's a sign of disciplined credit behavior. It has a medium impact on your credit score.
3. Number of Hard Inquiries: Every time you apply for a new credit product, the lender inquires about your credit score. Such inquiries by lenders and financial institutions are known as hard inquiries. Too many hard inquiries may negatively affect your credit score as it shows you to be credit-hungry. Multiple hard inquiries at the same time may have a considerable short-term impact on your credit score. However, if you check or download your credit report, it is considered a Soft Inquiry that has no impact on your credit score.
4. Credit Utilization: The ratio of the credit amount you spend to the credit amount available to you is known as the credit utilization ratio. It is recommended to keep your CUR to less than 30% of your available credit limit, though even a higher CUR barely has an impact on your credit score as long as you pay your credit card bill on time. However, maxing out the limit on your credit card frequently may indicate a high dependency on credit, which may negatively impact your credit score.
5. Credit Mix: If you have taken different kinds of loans like personal, auto or home loans and have responsibly paid them back, it shows your ability to handle different kinds of credit. Building a good credit mix over time has a positive impact on your credit profile. Also, if you have taken too many unsecured loans like personal loans, it shows you are credit-hungry and excessively dependent on credit. This may have an impact on your credit score, but if your repayment record is strong, it's unlikely to be anything significant. But do note that having too many active loans at the same time can also lead to a high "EMI to NMI ratio", which can lower your chances of getting more credit. However, credit mix has a low impact on your credit score and it’s unlikely that a lender will reject your application just because you do not have an optimum mix of credit products.
Other Factors Affecting your Credit Score:
Apart from the above 5 factors, which are primary in calculating your CIBIL score, there are other factors like errors in your credit report, lack of credit history and inability to fulfill your role as loan guarantor that may have a low negative impact on your credit score.
Read: How to Resolve CIBIL Dispute?