Banks and financial institutions check your credit score before giving you a loan. A credit score helps them in determining your creditworthiness, and it is the most important factor that determines whether you will get a loan or not. At Shriram Finance, you can get access to various credit solutions even with a not-so-good credit score. Apply for a personal loan and start building your credit score.
In this write-up, we will look at the major factors that impact your credit score.
What is a Credit Score?
A Credit score is an indicator that portrays your capability to repay borrowed debt. It is represented in numerical in the range of 300-900. Having a high credit score helps you in getting the loan approved easily. Typically, lenders prefer a credit score of 750 and above because it shows a high repayment capability of the borrower.
Now you must be wondering, who determines this credit score? The credit bureaus in India track credit scores. Four credit bureaus operate in India: TransUnion CIBIL™, Experian, Equifax and CRIF High Mark. These credit bureaus check your credit score depending on the repayment capability. Reputed NBFCs like Shriram Finance also provide options to check credit score for free.
What Factors Affect Credit Scores Negatively?
There can be various factors influencing your creditworthiness because of a low credit score. Here are a few of the factors affecting your credit score:
Your Repayment History
Lenders always have a risk of default on the payment by the borrowers; hence, they check your credit score factors that reflect your creditworthiness and portray your repayment history.
Credit Mix
Credit mix refers to the variety of credit accounts that make up your overall credit profile, including credit cards, mortgages, instalments, etc. The credit score is also calculated after considering the number of accounts you hold. However, the contribution of the credit mix in determining the credit score is significantly less. Hence, you should be cautious while opening multiple credit accounts.
Credit Utilisation Ratio
This credit rating factor determines how much loan you have taken compared to the available credit limit. Only making timely payments is not enough. For example, if you have a credit card with a spending limit of ₹50,000 and you max out your credit limit every month and repay it on time, your credit score would still decrease.
New Credit
Your credit score is also impacted by the addition of new credit accounts such as taking loans because these details are included in the credit score, which can be the number of credit accounts you have opened. New credit can include any kind of loan application, such as education loans, car loans, home loans, personal loans and credit cards. Moreover, when you open a new credit account, your lender may perform a hard inquiry on your credit report, which may hurt your credit report. Hence it is crucial to understand the credit rating factor.
Tenure of Credit History
The credit bureaus take into consideration your credit history. If you have a long credit history, it shows lenders your financial stability and responsibility for managing loans. Even if you have a short credit history and repay your dues on time, your credit score can be healthy.
These are the factors that impact the credit score and it is crucial to understand to make yourself financially literate.
Why is it Important to Maintain a Good Credit Score?
Having a good credit score is crucial for your sound financial reputation. There are many reasons a good credit score is essential, such as:
Eligible for Loans
A good credit score lets you get your loans approved quickly and get better interest rates because a good credit score indicates that you pay back your dues on time and are financially responsible.
Credit Cards
Having a healthy credit score allows you to get credit cards with better reward points, and you can get a higher spending limit on your cards.
Attractive Interest Rates
Banks and financial institutions may offer you loans with lower interest rates because having a healthy credit score indicates that you are financially responsible.
High Spending Limit on Credit Cards
Having a high credit score builds trust for lenders as it shows that you are financially responsible, and you may get a higher spending limit on your credit cards.
On the other hand, having a bad credit score impacts your credit card limit and leads to lower credit limits.
Faster Approval of the Loans
A good credit score allows you to get pre-approved loans if a particular bank or financial institution offers such loans. This way, you can get your loan amount quickly.
Beneficial for a Visa Application
A good credit score improves your chances of getting visa approval much faster. Because some countries may consider checking your income reports and credit score before giving you a visa.
A good credit score plays a crucial role in your financial journey as it improves your creditworthiness in front of potential lenders and helps you get better offers at the time you apply for a loan.
How Does Credit Utilisation Affect Your Credit Score?
Credit utilisation is the percentage of your available credit limit. Having a low credit utilisation of less than 30% increases your credit score while having a higher credit utilisation lowers your credit score.
How Credit Scores Are Calculated?
Banks and financial institutions keep a record of your credit-related information, such as your loan and credit card payment history, from credit bureaus.
With the use of this report, credit bureaus calculate your credit score and consider many factors such as payment history, credit utilisation, length of credit history, types of credit and recent credit activity.
Credit Information Collection: Lenders in India report your credit-related information, including your loan and credit card payment history, to credit bureaus like CIBIL™.
How to Improve Your Credit Score?
Credit score ranges between 300-900; the higher the score, the higher your chances of getting the loan or credit card getting approved faster. Improving your credit score is easy if you consider the following points:
Set Payment Reminders
Being disciplined while having a loan is crucial because the pending payment for the loan amount can significantly affect your credit score.
If you miss the payment due date it may lead to paying the penalty and lower your credit score.
Avoid Having Multiple Debts at a Time lower
Avoid having too many loans at a time. Repay your previous loans before taking a new one. Because taking multiple loans can lead you to a debt trap, it creates a negative image in front of lenders.
Keep Track of Your Credit Score
Sometimes, the system can mistake your credit score while updating the records, and incorrect records may lead to a decreased credit score. Hence, you should keep track of your credit score, and you can submit a dispute resolution form online if you see any discrepancy.
Select a Longer Tenure While Taking a Loan
While taking a loan, you may consider selecting a longer repayment duration to ensure that your EMI is low.
You can repay your loans quickly, but your credit score is affected if you default on the payment.
Customise Your Credit Limit
Your credit utilisation ratio has a significant effect on your credit score. Hence it is important not to max out your credit card because reaching the spending limit always affects your credit score negatively.
Improving credit scores is essential in the long run for your financial well-being and helps you get better loan deals.
What is Not Included in Your Credit Score?
There are many factors influencing creditworthiness, such as:
Savings and Investment Data
Your credit report will not show you any information about your savings or investment accounts; the credit score only checks your credit history and status, not your savings and sources of income.
Utility Bills
Your credit score also does not include information about the non-payment of utility bills such as electricity bills, telephone etc.
Your Salary
Credit reports also do not include any information about your salary, and you may not find any information about your net worth or earning capacity in the credit report.
Interest Rates of your Other Loans
If you have taken more than one loan, the interest rate of the previous loan does not appear in the credit report.
Your Employment Status
There is no information about the employment status on your credit report. Still, the report may contain their names if you mention your present and previous employer while applying for the loan. The importance of payment history in credit score stays on top, and employment status does not matter here.
Who Calculates Your Credit Score?
Credit bureaus calculate credit scores in India depending on the credit information they collect from different financial institutions and lenders. There are some of the leading credit bureaus that take care of the calculation of the credit score are:
- TransUnion CIBIL™
- Equifax
- Experian
- CRIF High Mark
The Bottom Line
A credit score is an essential factor that portrays your creditworthiness and indicates your finances. Understanding the above factors can help you improve your credit score, make smarter financial decisions and help you understand how credit utilisation affects your credit score.
Are you ready to take control of your finances? Understanding these factors that affect your credit score is vital before taking a loan. Whether you are planning to buy your dream car or build your home, explore a variety of loans from Shriram Finance.
Frequently Asked Questions (FAQs)
What can negatively impact your credit score?
Payment delays impact your credit score negatively as they portray your financial instability in front of potential lenders.
What habit lowers your credit score?
If you max out your credit card all the time or miss any payment for any debt, it can lower your credit score.
Does paying interest affect credit score?
Interest payment does not affect your credit score as the credit bureau pays attention more to payment history and not to interest charges.
Does bank balance affect credit score?
No, your bank balance doesn't have to do anything with the credit score because it has a connection with credit activities and not the balance in the account. However, having filed for bankruptcy may affect your credit score.
Do debit accounts affect credit scores?
Typically, debit accounts do not impact credit scores as they utilise their funds; on the other hand, credit account includes borrowing money, which affects the credit score.
What helps raise your credit score?
You can raise your credit score by paying your dues on time and balancing credit utilisation.
Why is my credit score going down when I pay on time?
Apart from paying back the dues on time, your credit score can often be reduced because of reporting errors or factors such as identity theft.
Do overdrafts affect credit scores?
Yes, overdrafts can lead to a lower credit score as they may indicate financial instability and can lead to negative account balances.
How can I improve my credit score naturally?
Repay your bills on time and avoid new loans to increase your credit score.
Is it possible for a credit report to have wrong information about a person?
Yes, in some cases, credit reports may have errors which can be corrected by submitting a form online. You can find this form on any credit bureau's official website.
Is it true that employers are looking at credit scores these days?
Some employers may consider checking the credit score while hiring a new employee.
Is it true that my employer's credit history will affect my eligibility for credit?
Typically, the employer's credit report does not affect your credit eligibility.
What are the two factors used to determine a credit score?
Payment history and credit utilisation are two factors used to determine a credit score.
How do you get a negative credit score?
If you get delayed in repaying your loan, default on the payment, or become bankrupt leads to a bad credit score.
What factors have the most significant effect on your credit score?
Factors such as payment history and credit utilisation can influence your credit score.
What things can lower your credit score?
Delays in payments or high debt can significantly decrease your credit score.
What are the 5 factors that affect a credit score?
Your credit score is affected by payment history, credit utilisation, credit mix, and new credit.
What are the 3 most significant factors impacting your credit score?
Payment history, credit utilisation and credit tenure impact your credit score.
What are the key factors that affect your credit score?
The main factors are payment history, credit utilisation, and the types of credit.
What is the most significant factor in your credit score?
Typically, payment history is the most significant factor in your credit score.
Key Highlights
- A credit score reflects your ability to repay debt.
- There are four credit bureaus in India: TransUnion CIBIL™, Experian, Equifax, and CRIF High Mark.
- Factors that affect credit scores are repayment history, credit mix, credit utilisation ratio, new credit and tenure of credit history.
- Having a healthy credit score allows you to get better offers on loan applications.
