Know Top Factors That Impact Your Credit Score

Last Updated on May 26, 2023 by hassan abbas

India boasts of a huge financial sector that consists of over 900 financial institutions and banks, which provide distinct types of credit facilities as well as loans to seekers. When lending a credit option like a loan, how do such institutions and banks check your credibility? The answer is via your credit score. 

As soon as you apply for the loan or any kind of credit, the bank or lender reviews your credit score. Hence, an excellent credit score is extremely crucial to avail of the loan easily at reasonable terms. 

Many factors impact a credit score. Here are discussed top five parameters impacting the credit score: 

Meaning of credit score

A credit score is a three-digit number which ranges anywhere from 300 to 900. This acts as a kind of summary of the applicant’s credit history and credibility. A credit score of 750 & above is considered an excellent score, and lenders usually prefer this when evaluating your credit application. For an applicant, it also ameliorates the chances of simply getting a credit facility at a reasonable condition. 

What parameters have the maximum impact on the credit score?

A credit score is generally impacted by various factors. Highlighted here are the top five factors that may impact your credit score:

Repayment history

An applicant’s credit score reflects your timeliness about your credit card bill or loan dues repayment. Defaults in loan or credit card bill repayments can negatively impact your credit score. The longer you take to repay your credit card bills or loan dues, the higher will be your unpaid bills, and the higher will be the negative impact on your credit score. Your repayment history makes up approximately thirty percent of your credit score. Thus, it is crucial to keep a thorough track of your repayment dates and ensure not to miss out on the due date to keep your credit score good. 

Credit utilization ratio

CUR or credit utilization ratio is a crucial factor that impacts your credit score as it accounts for nearly 25 percent of the credit score. If the borrower has constantly been displaying a poor spending habit, which includes spending beyond your means, this may result in a higher CUR, which can negatively impact your score. It is because the lenders look at a higher CUR as irresponsible behaviour on the borrower’s part. Ensure your CUR must not be over 30 percent of your credit limit. 

Number of credit inquiries

Lenders usually run a strict check on your credit report when there is any inquiry about your new loan or credit card. Hard check is majorly performed for gauging your repayment potential and thus can be a deciding parameter as far as approval of credit option is concerned. Whenever an individual places an application for a loan or credit card with several financial institutions, it shows your credit hungry attitude. 

A major concern of the lender is to ensure the timely recovery of funds that you have borrowed. Thus, routing for aggressive credit applications with multiple lenders may create a bad impression and show which the borrower might not be easily able to meet the loan repayment according to the lender’s expectation. 

Credit history length

Financial institutions generally hold a detailed record of an applicant’s credit history. Potential lenders even access a detailed credit report to avail ideas about credit usage and history. A good and long credit history holds a positive impact on the credit score of the borrower and assists in easily getting the credit. Lending institutions prefer a constant and positive repayment history, and it might thus be a great idea to avoid closing your old credit card. Closing your old credit card may make your credit score fall. 

Mix of credit

A mix of credit used by the borrowers comprises unsecured and secured credit options. You as a borrower must maintain a balanced mix for a higher credit score, i.e., a balanced mix between secured and unsecured credit options. A secured loan needs the applicant to pledge an asset to get the loan. Secured loans include a car loan, home loan, loan against property, gold loan, loan against securities etc. An unsecured loan in India does not need any security, for instance, a personal loan, a loan against a credit card etc. Borrowing distinct kinds of credit and timely repaying them can help build trust with lenders and creditors and impact your credit score.

You as a borrower must ensure to access the CIBIL report online at least once every 3 months to check it thoroughly. Checking your CIBIL report online can help you detect errors or misinformation in the report, which you can timely report for an immediate correction. Fetching your credit report also allows you to know your credit score and see other parameters to understand that you are responsibly meeting them for a better score. 

Ending note

Having a strong credit score is an easy way to avail of credit options at times of requirement. However, besides checking your score, you must also carefully consider reviewing all factors that impact your score, negatively and positively. Doing so can assist you in working towards a better score and helping to avail loan at better terms and conditions. 

Those with immediate loan requirements to meet financial emergencies can still avail of loans if you provide security or collateral. Loan for low CIBIL score includes gold loan, loan against property, loan against security etc. These loans, just like personal loans, can be used to meet your monetary mismatches for any personal reason without factoring in your credit score. 

FAQs (Frequently asked questions)