A good credit score is important to get quicker approvals of your loans or credit card applications. It is a crucial factor that helps banks and NBFCs to assess your repayment capabilities. A credit score is derived from your loan repayment behaviour. The CIBIL score ranges between 300- 900. The higher your credit score, the better the impression it gives to the potential lenders. A good credit score may also lead to reduced interest rates on your new loan. Hence, maintaining a good credit score is of utmost importance. Here are the key factors that are taken into consideration when calculating your credit score.
1. Repayment history: Your repayment history is one of the most important factors that decide your credit score. It comprises 35% of your total credit score. Thus, it is very crucial that you pay your bills on time and have a consistent payment record. If you default on your payments, it will negatively affect your credit score. On the other hand, timely payments would help you improve your credit score over time.
2. Outstanding dues: The amount of debt you owe accounts for 30% of the total credit score. Always be aware of your current status of wealth and borrow the amount that you can comfortably repay. Borrowing more than your repayment capacity shows that you are credit-hungry. Also, you should ideally use 30% or less of your credit limit. A higher credit utilisation ratio is considered negative by the lenders as it increases the chance of default. Hence, focus on minimising your debt as it would help in increasing your score.
3. Age of credit history: The age or length of your credit score accounts for 15% of your credit score. Age of credit history refers to the number of years that have passed since you opened your first credit account. Prospective lenders check your oldest accounts and the average of all your exisiting accounts. A longer history is considered good if there are no late payments or defaults on loans. This means that you are responsible when it comes to handling credit.
4. Type of debt: If you have a healthy mix of credit (secured and unsecured loans), it would help to boost your credit score. This means it is good to have a car loan or home loan as well as a credit card. Varying the loans will have a positive impact on your credit score. This signifies that you have a good experience in handling different types of accounts. It constitutes 10% of your total credit score.
5. Credit inquiries: The number of applications you make to avail credit are reflected on the credit score. It accounts for 10% of your total credit score. Each time you enquire about a credit card or loan, an inquiry is placed on your credit report. Applying with multiple lenders within a short period of time reflect poorly on the credit score as they make you seem credit greedy.
Hence, maintaining a good credit score is really important as it helps you to get loans quickly and often at lower interest rates. To ensure a good credit score, pay your credit card dues and loan EMIs on time, maintain your overall credit card debt at 30% or less of available credit limit and don’t apply for new credit unnecessarily.