Five factors that impact your credit score and how you can improve it

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Loans are the part and parcel of almost every individual, be it car loan, personal loan, home loan or even business loan. No person is ever missed by its need or ignore it on account of being expensive. Even a self-sufficient person requires loan for one reason or the other, however there is a certain factor which determines whether you have the necessary borrowing power to avail such loan. This factor is nothing, but your credit score, which portrays your timely repayment capacity.

In India, banks and financial institutions are bound to check your credit score prior to lending you any money. Therefore, if you have a poor credit score, your borrowing powers are in danger. Thinking about your credit score? First, let us understand what is credit score and how it affects you.

Credit score is mainly a three digit number which determines your credibility based upon specific parameters. These numbers typically range in between 300 – 900, where more the score better the credibility. These scores are determined by agencies that record your payment history and thereby generate the credit report. In India there are only four authorised company who are known as credit Information Company namely, Equifax, Experian, CIBIL and Crif High Mark.

These four companies have been granted permission by Reserve Bank of India (RBI) to operate as the credit information company aka credit bureau. These entities collect data relating to payment of loans and credit card bills of every individual as well as commercial entity as the case may be.

These companies are governed by strict regulation of Credit Information Companies (Regulation) Act of 2005, therefore any question of bias or false report is put to bed. Now let us look at factors that may affect your borrowing power:

Payment History

The first and foremost factor impacting your credit score is your payment history. Nearly 35% of your credit report comprises of this part, wherein history is used to predict the future. Matters such as number of missed payments, frequency, and amount of missed payment are generally looked into while studying payment history.

Credit utilisation

This generally pertains to credit cards and its utilised capacity. Every credit card comes with inherent credit limit and usage closer to exhaustion results into poor credit score. For example, if your credit limit is 45,000 and its utilised capacity frequently hovers around the 40,000 mark will result into poor report. Even though you are in limit of the credit allotted to you, it gives an impression of mishandling of your debt. Therefore paying in cash sounds much better than swiping your credit card.

Credit Mix

It relates to mixture of different loans and the capability to service all of them in time. A general perception says known devil is better than unknown likewise, a person with no credit card or payment history is dangerous than person who has managed different debts responsibly. According to credit bureau, through historical data, it easier to determine the credibility of the person. Therefore having history is better, and having sound history is beneficial.

Multiple enquiries

Multiple credit application conveys your credit requirement and creates a negative impact on your credit score. When you apply for new loan or credit card when your existing loan or credit cards outstanding are higher, it will hamper your borrowing power. Banks judge you by your existing loan amounts and your financial power.

Length of credit history

Similar to credit mix, person with longer credit history is considered more secure than person with shorter credit history. Since longer the period more the information becomes accessible and creates a better picture of his/her financial behavior. However person with shorter history will not be overlooked, if they have excellent repayment record and low credit utilisation.

Tips

Now since you know what credit score is, let us look at few tips to improve it, so that the next time you visit bank, you enter without a hint of doubt in your mind.

— Payment of credit card bills or loan EMIs before due date, as delayed payments are worst for your credit score

— Avoid multiple credit application, since it creates an image of excessive credit requirements and hamper your score unnecessarily.

— Do not exhaust credit limit, just because it has been given, instead try and maintain a minimum of 50% of unused credit limit in your card.

— Maintain optimum mixture of secured and unsecured loans, in order to achieve balance, since more unsecured (personal) loans may create negative impact on your credit score.

— Keep check on guarantor or co-signed accounts, as in case of default by the initial or other co-signed borrower, you become immediately liable for the dues. Further owing to your credit report the initial or other co-borrower have been sanctioned the loan, and any default can have severe impact on your credit score.

— Keep in check your credit score least every six months, in order to save yourself from loan rejections. Further it will also create an awareness to pay your bills on time.

Banks use different criteria for different loan, for example if car loan is applied then more prominence will be given to your credit history than any other factor. Each bank or financial institution has different criteria to obtain the credit report. Therefore, it is advised to follow all above tips and be rest assured. A healthy credit score not only makes you eligible for additional loans, but also entitles you to cheaper loans.

(The writer is founder, Money Mantra. Views expressed are personal)