‘Credit score’ has been the new favourite dinner discussion for all the personal finance enthusiasts out there. With hundreds of finfluencers on a drill to make dozens of videos on credit scores, we now see a great deal of awareness on the matter. In order to improve our credit score, we first need to know about the factors affecting your credit score.
Five factors affecting your credit score
1. Payment History
Payment history is a record of all your payments made to the lenders over the period of your credit history. The data shows all settlements you’ve done, be it on-time payments, late payments or missed payments. Hence, your payment history shows how efficiently you have been able to repay back the sum owed to credit card companies and loan providers. It reflects your ability to make timely payments of EMI’s and other debts that you owe to financial institutions.
2. Credit Utilization
Credit utilization is the amount of credit you use out of the total credit limit given to you. To maintain a healthy credit score, make sure that you dont exceed a credit utilization of 30%. To demonstrate it, let’s say you get a credit card with a limit of ₹1 lakh. In that case, you should only use ₹30,000 or less to maintain a decent credit score.
3. Credit Mix
A credit mix is an amalgamation of different types of credit instruments, like credit cards, loans, mortgages, etc that you owe to financial institutions. Each element in the credit mix has a different weightage in the credit scoring model.
4. Credit History Length
Credit history length is the age of your credit account opened with the bank or a financial institution. It is the duration from which your credit account was newly opened till the time you used the credit. This is why, experts recommend to avoid closing old credit cards. If you don’t use the credit card anymore, you can simply downgrade it to the point where you don’t have to pay the annual charges.
5. New credit applications
New credit applications often lead to hard inquiries. Multiple hard inquiries reduce your credit score, so avoid applying for too many loans or credit cards simultaneously.
These were the main elements that make or break your credit score. Now that we’ve learnt about this, it’s easy to get the ball rolling and work on target areas to improve the quality of credit scores.
What’s your credit score? And how long did it take you to build it? Share your credit journey in the comments below.
