Understanding Your Credit Score and Factors Affecting It

Your Credit Score

A Credit Score is a 3 digit number calculated by a Credit Information Company (CIC), or credit bureau, which summarises your credit history.

This credit score is a measure of your creditworthiness as an individual, or your ability to repay a borrowed amount towards a loan, a line of credit, or a credit card. It ranges between 300 to 900, and a score of 750 or above is considered good, although this varies across bureaus.

The bureau uses information provided by your bank about past repayment history, to predict the risk of you not repaying a future loan. A person with a history of timely repayment will have a higher credit score compared to an individual who has missed loan EMI payments or credit card dues.

In India, there are 4 RBI-approved Credit Information Companies or credit bureaus:

a) TransUnion CIBIL
b) Experian
c) Equifax
d) CRIF High Mark

In the OneScore app, you can check your CIBIL and Experian credit report and credit score for FREE.

5 factors affecting your credit score

When calculating your credit score, each bureau uses multiple data points along with their own algorithm and scoring model. However, these 5 factors are commonly used by bureaus to determine your credit score. Each of them carries its own weightage and importance, although the exact percentage for each factor may vary across bureaus.

1. Payment history

Payment history is the most important factor when calculating the credit score, and lenders look at this when determining your eligibility for additional credit - whether a loan or credit card.

Even a single missed or delayed payment can cause your credit score to drop, besides giving an indication that you could do so again in the future. Always make loan and credit card payments on time to avoid a negative impact.

Payment history usually accounts for 35% of your credit score.

2. Credit Utilisation Ratio

The credit utilisation ratio is an indicator of the credit limit used up by you, and is calculated by simply dividing your credit usage by your overall credit limit.

To a prospective lender, this shows how “credit-hungry” you are and also indicates you could be living beyond your means. You should ideally avoid using more than 30% of your available limit at any time and always make payments in full whenever possible.

Credit utilisation accounts for 30% of your credit score.

3. Length of Credit History

This is an indicator of how long you have been using a credit product, and the longer, the better. The bureau considers age of the oldest and newest accounts and the average age of all your accounts.

For lenders, a long credit history shows your ability to manage credit for longer periods, so don’t be in a hurry to get rid of your oldest credit card just yet.

The length of your credit history accounts for 15% of your credit score.

4. Credit Mix

It is good to have a “mix” of credit as it shows your ability to manage different types of credit products. Some common types would be: Home Loan, Vehicle Loan, Education Loan, or even a Line of Credit - which are instalment based (EMIs), and credit cards, which are billed upon usage.

Lenders consider these accounts when evaluating your application for new credit and how you are managing them, so a home loan would carry more weight and indicates higher stability than a personal loan or credit card.

Credit mix makes up 10% of your credit score.

5. New Credit

Each time you apply for a new loan or a credit card, a “hard inquiry” (or a hard pull) is done by the lending institution, and this is shown on your credit report. Too many new applications or new accounts may cause lenders to feel you are facing issues with managing your cash flows and financial obligations, and may lead to rejection of a fresh application.

A “soft inquiry” on the other hand, is when you check your own credit score or if a bank wishes to increase your credit limit or determine your eligibility for a credit product (without your applying for it).

New credit accounts make up 10% of your credit score.

In the OneScore app, you can get your FREE CIBIL and Experian credit score and credit report along with detailed information on these factors as well as tips to improve your credit score.