4 Factors That Affect Your Credit Score

You probably already know that your personal Credit Score is a critical aspect of your personal finances. Assigned by agencies such as CIBIL and Experian, a personal credit score typically ranges from 300 till 900. Any score above 800 is considered excellent, and implies that you are a highly creditworthy person. Scores closer to 500 or 600 are viewed as high risk cases by lenders, and many of them may choose to exclude individuals with such credit scores from their portfolios. Needless to say, having a high credit score is a highly desirable state to be in, because you’ll have the comfort of knowing that funds can be available to you easily, and at lower interest rates, in case of an emergency. In fact, individuals with scores of 825 and above often have “pre-approved” loans of up to Rs 5 Lakhs available for the taking from the net banking portals of their banks, without the need for any paperwork whatsoever. 

Although most people are aware of the importance of having a healthy credit score, fewer still know the key factors that impact it. Here are the four most important ones, in descending order of their weightage.

Your Payment History

Your payment history is the single most critical aspect of your credit score. Do you pay off your credit card bills on time, or do you generally run late by a few days? Do you pay off your monthly dues in full, or do you tend to roll over your amounts by paying off the minimum amount and incurring interest on the remaining balance? Do you ensure your bank balance is adequate on your loan EMI date, or do your EMI’s tend to bounce? Paying off your dues and EMI’s with zero glitches will boost your credit score like nothing else.

Smart Tip: Always pay off your credit card outstanding amount in full, a few days before your due date. Never overleverage and over spend on your card account. Make sure your account is funded on your EMI dates.

Your Credit Card Utilization Percentage 

Did you know that your credit card utilisation percentage impacts your credit score? Issuers view you as a higher-risk case if you’ve utilised a higher percentage of your overall credit limit. 0% to 29% is optimal, and above 80% puts you in the “high risk” zone. For instance, if you’ve got a credit limit of Rs.2 Lakhs, and you’ve utilised Rs. 1.75 Lakhs out of this, its going to drop your credit score the next month. 

Smart Tip: Have three or four card accounts but don’t use them all. Leave a few of them unutilised. Don’t take loans on your credit card that count towards your limit! Also (though this is a double-edged sword!), increase your credit limit to the maximum possible amount but do not utilise it.

The Age of Credit History

This one’s pretty easy to understand: the longer you’ve been a borrower, the better your credit score! If you’re a newbie loan-taker who has just taken up his first credit card, your credit score will be lower than someone whose owned a card for a decade. This is a “moderate impact” parameter and frankly – out of your control!

Smart Tip: Don’t flinch before taking up a credit card. Just determine to be disciplined in your repayments and don’t set too high a credit limit.

Your Total Number of Loan Accounts

The more your number of loan accounts (including credit cards), the higher your score. The logic is simple: prospective lenders like to see several accounts in your credit report, as it shows that other lenders have trusted your ability to repay your loans in a timely way. Above six loan accounts are viewed most favourably. This is a low impact contributor to your score.

Smart Tip: Since this factor is a “low impact” contributor to your score, don’t go overboard in taking on new loans in an endeavour to boost your credit score! In fact, it would be best to restrict your total number of loan accounts to 4 or less, or you could run the risk of overleveraging yourself and defaulting on your payments.