A credit bureau (such as TransUnion CIBIL, Experian, CRIF High Mark and Equifax) will consolidate your past credit history and repayment behaviour and will provide a comprehensive report to lenders. A credit score typically ranges between 300 and 900, with 900 being the highest score possible. A higher score makes you more creditworthy and vice versa. Typically, a score of around 750 or above is considered ideal to get your loan application approved by a lender such as a bank.
Here are five factors that play an important role in the calculation of one’s credit score.
1. Your repayment history
Your repayment history influences your credit score the most. A credit bureau keeps a month-on-month record of your payments towards your bills and loan repayment equated monthly instalments (EMIs) for the past few years. Normally by collating last 3 years payment history data, the credit bureau calculates your credit score. Adhil Shetty, CEO, Bankbazaar.com said, “A single late payment of EMIs or credit card dues has the potential to pull your score down by 100-plus points.”
2. Your Credit Utilisation Ratio (CUR)
CUR is the percentage of your available credit card limit being used in a month. This ratio has a big impact on your credit score. The more you use your credit card, the higher will be your CUR, and the more its impact in lowering your score proportionate to this parameter’s weightage. Ideally, financial planners say that one should keep one’s CUR under 30 per cent and ensure full and timely payment of credit card dues.
Radhika Binani, Chief Product Officer, Paisabazaar.com says that lenders consider CURs above 30 per cent as a sign of credit hungry behavior. “Credit bureaus also reduce their credit score by some points if you breach this mark. This makes it crucial to contain the CUR within 30 per cent to avoid a reduction in your credit score.”
3. The number of credit accounts
Your CIBIL score also depends on the composition of your loan portfolio, that is, the percentage of secured loans and unsecured loans in your loan portfolio. “This has a low impact on your score. Having different forms of credit – secured or unsecured – can lead to a higher credit score,” said Shetty.
4. Age/duration of credit lines
This has a medium impact on your score, Shetty said. The older your loan or credit card, the better it is for your score proportionate to the parameter’s weightage. It shows that you have used credit responsibly over a length of time by repaying your dues on time.
5. Number of credit inquiries made about you
Each time you take a new credit card or loan or look to refinance an existing loan, the new lender initiates a credit score check. Each such check can lower your score marginally.
Binani said, “Whenever you submit a loan or credit card application, the lender will fetch your credit report from the credit bureau to assess your creditworthiness. Such lender-initiated credit report requests are termed as hard inquiries, each of which reduces your credit score by a few points. However, instead of submitting multiple credit inquiries directly to the lenders, you should visit online financial marketplaces for selecting the optimal credit card or loan option after comparing various loan and credit card offers available basis your credit score, income and other eligibility criteria. In doing so, these marketplaces will also fetch your credit reports while offering the credit options. Such requests by marketplaces are termed as soft inquiries by the credit bureaus. Hence, applying for credit card or loan through soft inquires will not impact your credit score.”