Blog > The Complete Guide to Understand and Improve your Credit Score

Mar 29, 2019

Just like our health plays a crucial role in our future, our credit health plays a vital role in our financial future. A good credit score helps in loans with a low rate of interest, hence saving you lots of money over a significant period of time. It helps in getting and being eligible for various credit cards. On the contrary, a poor credit score is a big hindrance in getting any type of loan or credit card. Even if you get it by any chance, the rate of interest is quite high.

What is a Credit Score?

Credit Score is a 3 digit numeric summary that represents your Credit history. It ranges from 300 to 900. The closer the score is to 900, chances for getting a loan or a credit card is high. It helps the lenders decide creditworthiness of a person. The higher the score, the lower the risk. Any score above 750 is considered a good credit score. Credit report and score plays an important role in our life, which makes it essential to attain and then maintain a high credit score.

What are the factors that affect the Credit Score?

There are 4 major factors –

⇒ Payment History: Missing a payment or making the payment late for your credit card or missing EMIs of a loan, pushes the credit score down. There are various reasons that decide how much a credit score takes a dip depending upon how late repayment is made.

⇒ High Credit Utilization: High utilization of the available credit limit indicates a high repayment burden and affects your score negatively.

⇒ Multiple Enquiries: Enquiries are made when a person applies for a loan or a credit card. Multiple enquires indicate an increase in debt and hunger for credit. Lenders deal with caution in such scenarios as it also dips the credit score.

⇒ Credit Mix: A healthy mix of secured loans (Home loan, auto loan, etc.) and unsecured loans (Credit card, personal loan, etc.) is a good way to have a positive impact on your credit score.

Legends of a Credit report

A credit report contains the following:

⇒ Credit Score:

The most important 3-digit number of your financial life which have been discussed above.

⇒ Personal Information:

It contains your name, gender, date of birth along with PAN, Passport Number, Voter ID information, Drivers’ License Number and Aadhaar Number under the subsection – Identification. The lenders report these.

⇒ Contact Information:

The contact information like Mobile and telephone numbers, Email address and addresses shared by the lender appears here. Whether a particular address is a permanent address, residential address, office address or the temporary address is mentioned here too.

⇒ Employment Information:

When you open a credit account, be it a loan or a credit card, the lender keeps a close eye on the occupation and income. The information provided at that point of time appears here.

⇒ Account Information:

This is the most important section of the Credit report as it contains all the data and other details of all your credit card accounts and loan accounts. Name of all the lenders and type of credit that has been issued (auto loan, home loan, personal loan, credit card, etc.) is mentioned here. Information regarding Account numbers, single or joint accounts, when was the account opened, loan amount or credit limit, date of the last payment, the total amount due, last made repayment, current balance, and importantly, a monthly record of up to 36 months.

⇒ Inquiry Information:

Whenever a loan application or a credit card application is made, the lender makes an inquiry. Information pertaining to that appears here like the name of the lender, type of loan or credit, date of application and the value of the credit or loan amount applied.

⇒ Red box, if any:

It indicates dispute on the information over which there is a red box. It gets removed after the dispute is resolved.

How to determine the Credit Score?

Different bureaus use a different method of calculating the credit score, however, the basic is explained below-

⇒ What you owe – 30% –

The debt balance and the ratio of the debt to the credit limit is also a vital factor in the calculation of your credit score.

⇒ Payment history – 35% –

Are there any missed or late payments, do you pay the bills on time, in case of late payments how much is the delay are considered to play a significant role in calculating the credit score.

⇒ Types of credit – 15% –

The type of credit card or loan that a person uses also helps in calculating the credit score.

⇒ New Accounts – 10% –

Opening multiple new accounts in a short span of time shows the lender about high debt building that affects the credit score in a negative manner.

⇒ Length of Credit history – 10% –

How long have you been holding a credit or loan account also factors in calculating the credit score? A good length of credit history shows that the person has experience of handling credit accounts. This impacts the credit score positively.

What is a good score?

There is no absolute or full-fledged standard that lenders use to deny or approve an application. However, a score above 750 is considered to be good. The chart below is a guide. A good score is the one that works with and not against your life goals. Also, smart financial choices and being informed is the best strategy to put your credit score on an upward going graph.

Credit Score Range What it means
750-900 You get loans with the best rate of interest, credit cards with a high credit limit. It shows consistency in repayments of past or current credit accounts.
700-750 Also depicts good repayment habit but sometimes lender reads the account more precisely.
550-700 Considered low and shows an irregularity in repayment. Lenders might avoid giving loans or credit cards to you. However, in case they do, the rate of interest is high.
300-750 Considered very poor which reflects write-offs, over-leverage. Very difficult to get loans or credit cards.

How to improve your Credit Score?

If your credit score isn’t what you want it to be, not everything is lost. The credit score is fluid and by doing something now, you can improve your credit score quickly. You can even keep it towards the higher side of the scale in the long run.

⇒ Always pay monthly bills on time:

Late payments stay on the credit report and it hinders the ability to improve the credit score.

⇒ Get credit:

And use it. There is no credit history without the credit. If you don’t have a credit account, open it and use it in an informed and intelligent manner.

⇒ Don’t max out your cards:

Try not to use your credit limit to the full. Since high credit utilization impacts the credit score negatively.

⇒ Don’t be afraid to talk to your creditors:

If it’s difficult to repay, talk to the lender and ask if they can lower your monthly payment or rate of interest.

⇒ Avoid opening new accounts to spread debt around:

If you open multiple new accounts, in a short period of time, it shows hunger for credit. And also a risk of high debt involvement. Thus impacting the credit score in a negative manner.

⇒ Monitor your credit regularly:

Keeping a tab on your credit report also helps you in improving the credit score and to identify & correct errors if any.

Previous Article: How To Choose The Right Personal Loan And Line Of Credit

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