Know the seven factors that impact your credit score

Updated: January 23, 2019 7:20:29 AM

Credit score is one of the major factors considered during the approval of loan and credit card applications. Many lenders have also started factoring in credit score while setting interest rates. Your current credit score can play an important role in determining your financial fitness for a considerable period of time.

Loans: Know the seven factors that impact your credit score (Illustration: SHYAM Kumar Prasad)

By Radhika Binani

Credit score is one of the major factors considered during the approval of loan and credit card applications. Many lenders have also started factoring in credit score while setting interest rates. Your current credit score can play an important role in determining your financial fitness for a considerable period of time. However, the world of credit score is fraught with misinformation and myths and things considered as beneficial for your credit score may instead harm it and vice versa.

Here are the seven important things that you need to be aware of in your credit score.

High credit utilisation score
Credit utilisation ratio is the proportion of your total credit card limit used by you. Lenders consider credit utilisation ratio of over 30% as a sign of credit hungriness and hence, credit bureaus reduce the credit score on breaching this level. Thus, request credit limit increase or get an additional credit card on frequently exceeding 30% of your credit limit.

Wrong information in credit report
Credit reports list the credit information provided by lenders and credit card issuers on the basis of which your credit score is calculated. Hence, any error on the part of your lender or credit bureau or fraudulent credit transactions or applications may adversely impact your credit score and thereby, your future loan and credit card eligibility. Thus, fetch your credit report at regular intervals and report the discrepancies, if any, to the credit bureau and the concerned lender for rectification. Remember that individuals are entitled to at least one free credit report from each of the bureaus per year.

Avoid direct loan or credit card enquiries
Whenever you apply for a loan or a credit card, the concerned lender will request your credit report from the credit bureaus to evaluate your creditworthiness. Credit bureaus consider such requests as hard enquiries and each of them is listed in your credit report and reduce your credit score by a few points. Hence, avoid making multiple loan and/or credit enquiries within a short span of time as that can significantly reduce your credit score.

Co-signed or guaranteed loans
Co-signing or guaranteeing a loan makes you equally liable for ensuring their timely repayments. Hence, any delay or default in their repayments would equally impact your credit score. Thus, always ensure to regularly review the repayment activity in your co-signed or guaranteed loans.

Higher share of unsecured loans
Credit mix refers to the ratio of your unsecured and secured debt. Lenders prefer lending to those with higher share of secured loans like home loans, car loans, loan against property, etc., and hence, credit bureaus too score such borrowers higher. Thus, those aiming to improve their credit score quicker can prepay their unsecured loans like personal loans, loan against credit card, etc. This will increase the share of secured loans, and thereby increase their credit score. Alternatively, you can also improve your credit mix by replacing unsecured loans with secured ones like top-up home loan (in case of existing home loan borrowers), gold loan, loan against securities, etc.

Retaining old credit cards
People with lower credit scores often close their credit cards hoping that doing so will improve their credit score. However, doing so might reduce your credit score further. First, closing your credit card would decrease the average age of credit accounts. As lenders prefer to score borrowers with longer average age of credit accounts, decrease in the average age of your credit accounts might negatively impact your credit score. Second, closure of your credit card(s) would also reduce your total credit limit.

Credit cards build score
Making payments through credit cards is equivalent of taking loans. Hence, timely repayment of your credit card outstanding would favourably impact your credit score the same way as timely repayment of loans do. Additionally, using credit card is also the most cost-effective way of building credit history as it does not involve interest cost as long as the credit card bills are paid by the due date.

The writer is chief products officer,
Paisabazaar.com

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