6 Factors That Affect Your Credit Score Points
Your income and repaying capacity are vital factors, but the single most crucial factor that determines whether you get the loan or not is your credit score. Different products require different credit scores. You need a credit score of a minimum of 750 to be eligible for Credit Cards and Personal Loans. A score in the range of 650 and above is enough for you to apply for Home Loans, Loan Against Property, and so on.
Factors That Affect Your Credit Score
A variety of factors affect your credit score. Let us discuss them in brief and see how your credit score can increase or decrease accordingly.
1. Your Repayment Record
Taking loans is one aspect. Repaying them on time is essential. You need to have an excellent and impeccable record for your credit score to improve. Adhering to your repayment schedule is crucial. Any delay in the repayment of the loan can not only attract late payment charges but also affect your credit score adversely. Banks report the monthly position of their outstanding loans to the credit bureaus. As you Apply for Credit Cards and loans, your credit score takes a hit. Repaying the loans and the Credit Card bills on or before the due dates helps you to improve your credit score.
2. Credit Utilisation Ratio (CUR)
Having Credit Cards for the sake of owning one is not enough. You should use them properly and repay the bills before the due date. Repaying the bills on time has a significant advantage. You become eligible to avail the interest-free period on the Credit Card. This period can go up to 52 days depending on the billing cycle. The credit bureaus look at your repayment record. They also monitor the usage of your Credit Card. The CUR is the proportion of the outstanding amount on the card to the limit sanctioned by the bank. An ideal CUR is around 30%. Anything above that can reduce your credit score. It is ironical that a low CUR can also affect your credit score.
3. Maintain the Balance Between Your Secured and Unsecured Debt
A secured loan is one where you provide collateral to the bank. The prime example of a secured loan is the Home Loan or a Loan Against Property. The unsecured loans are the Personal Loans and the different type of Credit Cards you use. The bank does not have any security against these loans. The credit bureaus show more interest in how you repay the unsecured loans. Therefore, it is always beneficial to have a healthy mix of secured and unsecured loans. A high proportion of either of the loans can affect your credit score adversely.
4. The Number of Credit Enquiries
Whenever you apply for a loan or a Credit Card from a bank or NBFC (Non-Banking Financial Company), they check your credit history to determine your repayment record. It is known as a hard check on your credit history. Every such hard check reduces your credit score. At the same time, you can also request for your credit score. You can check your credit score online as well. Such checks are soft checks. They do not affect your credit score in any way.
5. The Length of Your Credit History
The longer credit history you have, the better is your credit score. If you close some of your oldest accounts like your PersonalLoans or any other loan, it brings down the average age of your credit history. However, closing an old loan is unavoidable. You cannot keep a loan active forever. However, you can keep your old Credit Cards open by using them properly. Thus, you maintain your old accounts and increase the length of your credit history with each passing year. It helps to improve your credit score.
6. Applying for Multiple Loans at a Time
Applying for multiple loans at the same time shows that you are desperate for credit. It affects your credit score by reducing it considerably. Credit bureaus understand the types of searches made by the banks. It is natural for you to check out various banks when you apply for a Home Loan. However, you do not do that for a Personal Loan. The credit bureaus can judge the nature of your credit checks and decrease the credit score accordingly.
- Keeping your accounts and Credit Cards alive isvital for increasing your credit score
- Remember to repay your loan instalments on time
- Refrain from applying for loans indiscriminately
- Maintain your credit utilisation ratio at around 30%
- Ensure to maintain a sufficiently long credit history
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