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Know Your Score: The Ingredients of a Healthy Credit Profile
Your credit score is a numerical representation of your creditworthiness and financial responsibility. This three-digit number can greatly impact your ability to secure loans and credit cards and even influence the interest rates you're offered. Understanding the factors contributing to your credit score is crucial for maintaining and improving your financial health. In this blog, we'll understand the key factors that affect your credit score and explore ways to manage them effectively.
Payment History
Accounting for about 35% of your overall score, payment history is one of the most significant factors influencing your credit score. Lenders want consistent, on-time payments for your debts, such as credit cards, loans, and mortgages.
Late payments and defaults can significantly lower your score and stay on your credit report for several years. Set up reminders, automate payments, and budget responsibly to maintain a positive payment history.
Credit Utilization Ratio
The credit utilization ratio measures how much of your available credit you're currently using. It makes up around 30% of your credit score.
High credit utilization, where you're using a significant portion of your available credit, can signal financial stress and negatively impact your score. Aim to keep your credit utilization below 30% to show lenders you can manage credit responsibly. For example, if your available credit limit is Rs. 1,00,000, you should ideally use about Rs. 30,000 of your credit.
Length of Credit History
The length of your credit history makes up about 15% of your credit score. Lenders prefer to see a longer credit history as it provides a better picture of your financial behavior. If you're just starting to build credit, keeping your oldest accounts open and active is a good idea to lengthen your credit history. However, if you have a short credit history, focus on factors like payment history and credit utilization to strengthen your score.
Types of Credit
The variety of credit accounts you have, such as credit cards, installment loans, and mortgages, contributes around 10% to your credit score. A diverse mix of credit accounts can demonstrate your ability to responsibly manage different types of credit. However, avoid opening too many new accounts at once, as this can negatively impact your score.
New Credit Inquiries
When you apply for new credit, a hard inquiry is initiated, which can temporarily lower your credit score. Multiple hard inquiries within a short period can suggest financial instability. Each hard inquiry typically affects your score for up to two years. It's advisable to be cautious when applying for new credit and only do so when necessary.
By understanding the factors that affect your credit score, you can take proactive steps to maintain a healthy credit profile. Remember to prioritize on-time payments, manage your credit utilization, maintain a diverse credit mix, and avoid unnecessary new credit inquiries. With responsible financial habits, you can work towards improving your credit score over time and securing a brighter financial future.
