If you’re keen on knowing what a credit score is and what are its determinants, this article is for you.
What is a credit score and why is it important?
A credit score is a mark of your credit health. It’s a number ranging from 300 to 900 and the closer your score is to 900, the better is your credit health. The better your credit health, the better will be your chances of getting a loan/credit card in times of need. This is so because a prospective lender will most likely fetch your credit score from credit bureaus when you’ll apply for credit.
So, what makes a good credit score go bad?
4 Factors Affecting Your Credit Score
There are multiple factors that contribute towards your credit score but the prime four factors are as stated and explained below:
1. Repayment Record/Credit History
Your credit repayment history is the most important component of your credit score. If you have been diligent in meeting your credit dues and have been paying your loan EMIs in time, your repayment record will be considered very good and this will impact your credit score positively.
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.
2. Age of Credit History
The age of your credit history gives a clearer view of your credit track record. The longer you’ve been in the credit system, the better it will be for the lender to understand how you manage your credit. But if you’re quite new to credit, then one cannot properly ascertain as to how you may behave in future and an uncertain situation is not something a bank finds very favourable.
3. Credit Utilization Ratio
Credit utilization ratio basically shows how credit hungry you are. A lender always checks the ratio of the credit utilised to the total credit limit available. A high credit utilisation ratio is considered negative by the credit bureaus as it increases the chances of default. You should try to limit your credit utilization at a maximum of 30% of the total credit available to you.
Suppose you have a credit limit of Rs 100 and you’re using Rs 30. Then your credit utilization is 30% and is a preferable one. This means you are not credit hungry and in case of an emergency, you have kept your options open.
Lenders prefer to lend money to responsible and financially stable borrowers who have better chances of paying back the borrowed money.
4. Credit Mix
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, especially of an unsecured loan would affect your credit score negatively. Borrowers who have a balance of revolving credits and secured loans that are paid back in time tend to have a higher credit score than those who only have unsecured debt.
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 your 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, get your free credit report today from Paisabazaar.com.