Key Highlights:
- Payment history has the biggest impact on your credit score, accounting for 35% of the total score.
- Maintaining low levels of debt relative to your credit limit has a positive impact on your credit score.
- The length of your credit history plays a significant role in determining your credit score.
- Having a diverse mix of instalment loans and revolving credit accounts positively impacts your credit score.
- Applying for multiple new credits within a short time frame can negatively affect your credit rating.
Introduction:
Credit scores are important in many facets of personal finance. A solid credit score is required to qualify for the best rates and terms when applying for a loan, mortgage, or credit card. Understanding the elements that influence your credit score is critical to increasing your creditworthiness.
Shriram Finance provides a variety of credit options adapted to individual needs, such as loans for commercial vehicles, two-wheelers, cars, houses, gold, personal finances, and small enterprises. In this article, we will look at the five factors that affect your credit scores and offer concrete advice to help you improve them.
Your Payment History
Your payment history has a significant credit score impact. It accounts for 35% of your total score and shows whether you've paid your credit card or loan bills payments on time in the past. Lenders take into account the specifics of any late payments, such as the amount of time they have been past due and the frequency with which they have occurred.
Assume you were 30 days late on a credit card payment. This can result in a big drop in your credit score of 60-110 points. The longer the payment is late and the more frequently you miss payments, the worse the impact on your credit score.
It is critical to make on-time payments each month to improve your payment history and credit score. You can set up due-date reminders or autopay (even if it's just for the minimum amount due) to ensure you don't miss any payments.
Your Credit Utilisation
The amount owed on your credit accounts contributes to 30% of your credit score. This factor is measured by your credit utilisation ratio - the proportion of available credit you are currently using.
To calculate your credit utilisation ratio, divide the balance carried on a specific account by its credit limit. For example, if you have a credit card with a ₹10000 balance and a ₹50,000 credit limit, your credit utilisation ratio is 20%.
Financial experts recommend keeping your credit utilisation ratio below 30% for optimal credit scoring results. If your individual or total credit utilisation is too high, it can impact your credit score negatively.
To improve your credit utilisation and positively impact your credit score, focus on reducing the balances on your revolving debt, such as credit cards. Paying off these balances or keeping them near zero can help improve your score. It's important to note that instalment loans, like car or mortgage loans, do not factor into your credit utilisation ratio.
Length of Credit History
The length of time you've had credit accounts for 15% of your credit score. Factors considered in this category include the age of your oldest and newest accounts and the average age of all your accounts.
For example, if you opened three credit cards in 2009, 2014, and 2022, the average length of time you've had credit is eight years. Each time you open a new account, it decreases the average length of your credit history.
Avoid closing old credit card accounts whenever possible. Closing an old account can decrease the average length of your credit history. Additionally, keeping older accounts active by making small charges and setting up autopay can prevent issuers from closing them due to inactivity.
Types of Credit
The types of credit you have make up 10% of your credit score. FICO classifies different types of accounts, such as credit cards, retail accounts, instalment loans (like car loans or mortgages), finance company accounts, and mortgages.
Maintaining a diverse mix of instalment loans and revolving credits shows lenders that you can manage various financial obligations. While this factor has a minor impact on your overall credit score, having a range of well-managed credit accounts can have a positive influence.
To improve your credit scores based on this factor and positively impact your credit score, focus on responsibly managing a variety of credit products. This could include having a mix of instalment loans and revolving credit accounts like credit cards or home equity lines of credit.
New Credit Inquiries
New credit inquiries account for 10% of your credit score. When you apply for new credit accounts, such as credit cards or loans, the lender performs a hard inquiry on your credit report. These hard inquiries can lower your credit score by a few points and remain on your report for two years.
Multiple hard inquiries within a short period may signal to lenders that you are a high-risk consumer. This can result in denial of your application or less favourable terms. Nevertheless, when you look for the best loan deal, such as a car loan, student loan, or mortgage, within a certain timeframe (typically 30-45 days), these inquiries are frequently grouped as a single inquiry to minimise the adverse effect on your credit score.
Only apply for new credit when necessary to minimise the number of hard inquiries and positively impact your credit score. This will help prevent your average account age from decreasing and keep your credit score intact.
The Amount and Variety Of Lenders
The amount and variety of lenders have the biggest impact on credit scores. When borrowers have a diverse mix of credit accounts from different types of lenders, such as banks, credit card companies, and mortgage lenders, it can positively influence their credit score. This demonstrates their ability to manage various financial obligations responsibly.
Additionally, having multiple lenders can increase an individual's total available credit, which can help lower their credit utilisation ratio – the amount of credit used compared to the total available credit. A lower utilisation ratio is generally favourable and can contribute to a higher credit score. However, it is crucial to manage these accounts diligently to avoid any negative impact on the credit score.
Conclusion
Understanding the factors that have an impact on your credit score is crucial for better financial outcomes. By maintaining a good credit score, you can qualify for competitive interest rates and favourable terms when applying for loans or other financial opportunities. Shriram Finance provides tailored credit solutions for diverse needs, including loans for various purposes and fixed deposit offerings. Take control of your financial future by improving and monitoring your credit score today.
