A credit score is a three digit number that ranges between 300 – 900 and reflects your credit worthiness. Lenders look at your credit score before making any lending decision. A credit score of above 750 is considered as a good score. The higher the credit score better are the chances of getting your credit request approved. This credit score is calculated by credit bureaus in the country and different credit bureaus use different algorithm to calculate credit score.
Additional Reading: How is the CIBIL™ Score calculated?
There are certain key factors based on which your credit score is calculated.
Let’s look at these factors below:
A payment history plays a vital role in forming your credit score. It constitutes 30% to 35% of your credit score. This is based on the timely repayments of your EMIs and credit card bills. Late or missed payments, settlements, defaults and bankruptcies can reduce your credit score. So, keeping a good payment history by always paying bills on time and in full will help you improve your credit score.
Credit utilization constitutes 25% to 30% of your credit score. It is advisable to keep your credit utilization as low as possible, should be below 30% of your credit limit.
Using too much credit can negatively impact one’s credit score. Credit card utilization is computed based on two elements – Credit limit and how much loan has been consumed.
Length of credit history
The next important factor that has medium impact on your credit score is the age of one’s credit history. The longer the credit history, the better is your credit score. The lenders can gather more information to assess an individual’s creditworthiness. Therefore having lengthy credit history can positively impact your credit score.
Multiple Credit inquiries
Too many hard inquiries can have a negative impact your credit score. It can take off about 5 points from one’s credit score based on one’s credit profile. Therefore it is advisable to not apply for many credit products in a short span of time.
A credit mix also plays an important part in your credit score. It is necessary to have a mixed portfolio of secured and unsecured credit in your credit profile. With a good balance between secured and unsecured forms of credit helps you improve your credit score. Secured credit is a gold loan, auto loan, two-wheeler loan or a secured credit card whereas unsecured credit can include a personal loan, an educational loan or a credit card.
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