Understanding Your Credit Score and Factors Affecting It

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.

This credit score is a measure of the creditworthiness of an individual, or ability to repay a borrowed amount towards a loan or credit card. It usually ranges from 300 to 900, and a score of 750 or above is considered good.

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 payments towards loan EMI or credit card dues.

Understanding Your Credit Score

Factors that determine your credit score

When calculating your credit score, the bureau takes into account several factors and some of them are:

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

Always make loan and credit card payments on time to avoid a negative impact.

Credit Utilization:

The credit utilization 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. Typically, credit utilization accounts for 30% of your credit score.

Avoid using more than 30% of your available limit at any time and always make payments in full.

Credit Mix:

It is good to have a “mix” of credit as it illustrates your ability to manage different types of credit products. Some common types would be: Home Loan, Personal Loan, Car Loan, Education Loan - which are installment based, and credit cards, which are revolving. This means only a minimum amount is due each month, and the remaining balance is “revolved”.

Lenders will consider these accounts when evaluating your application and how you are managing them, for eg. a home loan would carry more weight and indicates higher stability than a personal loan or credit card. Typically, credit mix accounts for 15% of your credit score.

Have a healthy mix of credit products and avoid too many loans or credit cards.

Length of Credit History:

This is an indicator of how long you have been using a credit product. Ideally, the longer you have an active credit product, the better. Typically, 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 and also indicates a degree of stability. The length of your credit history accounts for 10% of your credit score.

If you have an older credit card you don’t use much, it would be advisable to retain it.

New Credit:

The bureau and lenders will consider how many new credit accounts you have opened recently. Each time a new loan is taken or when you apply for a new credit card, the financial institution will do a “hard inquiry” (or a hard pull). A “soft inquiry” on the other hand, is when you retrieve your own credit information or if a bank wishes to increase your credit limit (without you applying for it).

A hard inquiry can impact your credit score as opening new credit accounts assumes a greater risk, especially in the case of several new credit accounts, as lenders may feel you are facing issues with managing your cash flows.

Do note that if you’re looking to buy a house and approaching multiple lenders while “shopping” for the best rate, such multiple inquiries would usually be considered as a single hard inquiry, especially if within a 30 day period, though this would vary across bureaus.

New credit accounts would make up 10% of your credit score. Avoid applying for too many new loans or credit cards as these will also generate hard inquiries.

In India, there are 4 RBI-approved Credit Information Companies or credit bureaus: CIBIL, Experian, Equifax, and CRIF High Mark. In the OneScore app, the credit score and credit report are fetched from Experian.

Get your FREE CIBIL and Experian credit score and credit report now!