5 Things affecting your credit score

Posted on Tuesday, November 22nd, 2022 | By IndusInd Bank

Did you ever try applying for a loan or a credit card? Do you know what is the first thing that any bank or lender checks about you? Yeah, you guessed it right – it’s the Credit Score. A credit Score is a 3-digit number that ranges from 300 to 900 and reflects your creditworthiness. In other words, your credit score enables the lender to gauge the credit risk involved. A credit score above 700 is considered good. However, the higher the credit score, the higher is the lender’s trust in you and hence more favourable the credit terms.  

Here’s the general categorization of credit score ranges and what they signify. 

Now, if you have a low credit score, how can you fix it? Well, just read through this article to know all about credit score—what’s affecting it and how to make it better. 

Factors Affecting Credit Score 

• Repayment History: Your repayment history is what largely makes up your credit score. If your past records show timely repayment of dues/EMIs, the same would reflect in your credit score. Similarly, any defaults or delays in the payment of dues/EMIs adversely affect your credit score. Therefore, it is highly critical to clear your outstandings on time to improve your credit score. 
   
• Credit Utilisation: Another big factor impacting your credit score is the debt you owe. Out of all the credit limits available to you, including credit cards, loans, buy now pay later (BNPL), etc., the degree of utilisation of each credit option plays a key role in determining your credit score. Ideally, it is advised to utilise only up to 30% of the credit limit available to you during a statement cycle. More the credit utilisation, lesser the financial stability it signifies.  

• Age of Credit History: The length of your credit history is another factor that adds weight to your creditworthiness. Your credit score is calculated while taking into account how long you have been using the credit options for. For instance, a longer credit history with timely repayment record is highly beneficial in boosting your credit score. However, a short credit history is also fine if repayments have been made on time. Some financial experts suggest to leave the credit card accounts open even when not in use as the longer the account ages, the better the impact it creates on the credit score. 
   
• New Credit Inquiries: Even though it is hard to believe that your credit score is also affected by the number of new loan/credit inquiries you make with any financial institution, it is true. This is because, every time you make an inquiry for new credit option, the financial institution runs a hard check on your credit information which might temporarily affects your credit score. The more the number of inquiries, the more the credit hungry your credit profile appears. In addition, a higher number of credit inquires also signifies that you are in need of a lot of credit and consequently pose a greater risk of default.  
   
• Mix of Credit: The final and the least-affecting factor that impacts your credit score is the mix of credit options you are using. Ideally, a credit history with a mix of secured and unsecured loans like credit card, BNPL, home loan, car loan, etc. and on-time repayment record typically has a better credit score than the one with only type of credit instrument in use. Nevertheless, as this factor contributes to only around 10% of your credit score composition, it is not advised to start inquiring or applying for new credit instruments available to you, unless required. 

Pro Tips to Boost your Credit Score 

As you now know about the factors that impact your credit score, here are some points you must bear in mind to build a healthy credit profile. 

• Keep a check on your credit card utilization. Never use more than 30% of the credit limit available to you. Ideally, it is advised to maintain your credit card balance utilisation between 15 to 25%. 
• Track your credit score regularly. Read the credit report carefully and make sure it is free from any errors. Report any irregularities (if found) immediately. 
• If you require a big-ticket loan, it is advised to check your credit score at least six months prior to it. This will provide you with some time to strengthen your score and boost your chances of loan approval. 
• It is highly critical to not open too many credit accounts at-a-go or within a particular year. Because the more the number of credit inquiries, the greater the impact on your credit score. 
• Make sure you always repay your loan EMIs and clear your credit card dues on time. If you’re late, it is advised to not push these for more than 30 days beyond the due date. 

And no matter what is your financial need, we at IndusInd bank are always there for you with best offers across personal loans & business loans. Summing up, though you need to be mindful of the facts and factors presented in this article, you don’t need to obsess over them. Managing your credit responsibly and maintaining healthy financial habits would ultimately result in a good credit score. 

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Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision.  IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.