Key Factors that Affect Credit Score
What is a Credit Score?
The term 'credit score' has become popular as of late, but not everyone knows what it entails. Let's take a quick look at it. A credit score is a number which shows how trustworthy one is with their money. Lenders look at one's credit score before they decide to give a Loan or Credit Card. The higher the score, the better one's chances of getting a Loan approved at lower interest rates. It is a number between 300 and 900, and a score of 750 or above is considered good.
Credit scores in India are calculated by four credit rating agencies. Each bureau uses a different method to calculate the credit score. So, it may vary slightly among them.
Key Factors Affecting Credit Score
Repayment habits: Repaying current debts on time can make a big difference to one's credit score. Not making payments on time will lead to applicable fines and maybe even a hike in the interest rate. This can hurt one's credit score.
Credit mix: Having varied types of credit accounts (Home Loan, Personal Loan and Credit Card) shows lenders that one can manage different kinds of debt. This will help boost one's credit score.
High credit utilisation ratio: The credit utilisation ratio is the amount of credit one uses compared to their credit limit. Keeping the credit utilisation rate low can help improve one's credit score. If the rate is above 30%, it can indicate that one depends too much on credit and might have weak spending habits.
Length of credit history: The longer one has taken credit, the better it can be for their score. A longer credit history generally indicates stronger financial habits, which can result in a higher credit score.
Paying only the minimum amount due: Making the minimum payment on credit accounts can impact one's credit score negatively. It is important to pay more than the minimum payment to show responsible credit behaviour.
Closing a credit card account: Closing a credit card with a large credit limit can increase the credit utilisation ratio, which can negatively impact the credit score.
Recent credit inquiries: Applying for too much credit within a short period may make it seem like one is desperate for credit. This can hurt one's credit score.
In summary, a good credit score can help one meet their financial needs with favourable lending conditions. By maintaining a good credit score, one can improve their financial stability and access to credit, which can ultimately help one achieve their goals.