Your credit score is the key metric that sums up your credit health. It is one of the important factors that help lenders and credit card issuers to gauge your creditworthiness while approving your credit products such as a loan or a credit card application. Higher the credit score, lower is the risk of default and vice versa. Below are some of the top factors that can impact your credit score.
- Credit Repayment History
It is the most important factor that impacts your credit score. It accounts for about 35% of your score and is used by lenders to evaluate your creditworthiness. If you have made any default in paying your credit card bills or loan EMIs, it will likely to be negatively impacting your score. And if you have paid all your outstanding dues on time, you will be rewarded with a better credit score.
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Credit Utilization Limit
Credit Utilization Limit is the amount of your credit card balance compared to your credit limit. This factor accounts for 30% of your credit score. Typically, the lower your credit utilization ratio, the better it is. As it demonstrates that you can responsibly pay off your debts on time. Ideally, you should use 30% of the credit limit to maintain a good credit score.
- Credit History Length
How long you have held credit accounts makes up 15% of your credit score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit score.
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Credit Mix
Another category that has an impact on your credit score is the different types of credit accounts you have open, including credit cards and loans. While calculating your credit score, credit bureaus consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix accounts for 10% of your credit score.
- New Credit
The number of credit accounts you've recently opened, as well as the number of hard inquiries lenders make when you apply for credit, accounts for 10% of your credit score. Opening too many accounts or creating inquiries indicates increased risk which can hurt your credit score.
- Paying Only the Minimum Amount Due
A minimum amount due is a small portion of the principal amount that is outstanding every month. You will fall into a debt trap if you are in the habit of paying only the minimum amount due every month leads to the interest compounding on your outstanding balance. So, it is advised to pay your credit card bills in full and on time to avoid paying a late fee. It also reflects poor repayment behaviour.
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Closing Old Credit Card Accounts
Credit cards are a great tool that helps you to build a solid credit history, only if you use it responsibly. Your credit card accounts represent your credit usage and the length of your credit history. So, when you close your old accounts, you end up losing a long credit history associated with it. Therefore, if you have used the card for a substantial number of years, it is advised to keep it open if possible, if feasible, consider closing a relatively new card.
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Not checking your credit report for errors
It is very important to keep a tab on your credit report in every six months to rectify errors. The delayed reporting or wrong reporting by banks may reflect faulty information on your credit report and reduce your credit score.
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Loans as a Proportion of Income
A lower balance on your loan account is an indication of healthy credit usage and contributes to a higher score. High loan balance signifies that you are already in too much debt and extending more credit may not be a viable option, since the propensity to pay back is lower.
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Multiple loan applications
Whenever you apply for any credit product such as a loan or a credit card, the lender first checks your eligibility to evaluate how creditworthy you are and how disciplined you were in making your payments. Too many of such queries negatively impact your credit score as this may portray you as a credit hungry person. Multiple loan application will project to your lender that your loan burden is likely to increase in the future and it may be challenging for you to pay your debts on time.
So, these were some of the major factors that adversely impact your credit score. These factors keep on changing frequently, so be sure to keep tabs on it by checking your report and score consistently.
