What Affects Your Credit Score & How To Build a Healthy Credit Score
12 September, 2024 | 18:22 IST
A good credit score is crucial for overall financial well-being. It indicates your credit worthiness, which can help you avail a range of credit services at lower interest rates and with favourable terms.
Your credit score also plays a key role during big financial decisions. Imagine you are planning to buy a house. While visiting a bank for a home loan, you suddenly discover that your credit score is lower than what you would have hoped for. You regret not having built a high credit score, as your credit score can significantly impact your loan options.
The awareness about credit score is rising in India. According to a report by TransUnion CIBIL in February 2024, the number of Indian consumers enrolling to monitor their CIBIL Report and Score saw a 73% year-over-year growth in 2023. The study highlights that 57% of consumers monitor their credit scores in anticipation of opening new credit accounts, while 23% aim to improve their scores, and 20% focus on managing their debt more effectively.
Let’s dive into what impacts your credit score, how you can check it, and why it’s so important for your financial health.
A credit score is a numerical representation of your creditworthiness, reflecting how reliably you manage credit and repay debts. This score, which ranges from 300 to 900, significantly impacts various aspects of your finances, such as loan approvals and interest rates. In India, there are four credit bureaus: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark that provide a credit score and credit report. These scores play a crucial role in determining your eligibility for loans. To stay on top of your financial health, you can easily perform a credit score check online. However, do check if the service is free or comes at a cost.
What are the factors that affect your credit score?
Understanding the factors that impact your credit score is important for improving it. To enhance your credit score, you need to know what influences it and how each factor contributes to your overall credit health.
Payment history: Your payment history is one of the most important variables influencing your credit score. It includes the frequency of your missed payments. Loan defaults or late payments can also lower your credit score. A good credit score can be maintained by managing your debts sensibly and making your payments on time.
Credit utilisation: The percentage of your available credit that you use is known as credit utilisation. In India, a credit utilisation rate of less than 30% is considered favourable. Managing a lower percentage indicates responsible credit use and can positively impact your credit score.
Length of credit history: Your credit score may benefit if you have had credit accounts for a long time and have handled them responsibly.
Types of credit accounts: Your credit score can also improve with different types of borrowings, such as having a healthy mix of credit cards and loans. A varied credit portfolio shows your ability to manage different kinds of credit responsibly, which can positively impact your credit score.
Credit checks: Lenders perform a hard enquiry on your credit report when you apply for a new credit product. Your credit score may be impacted by several hard inquiries made in a short amount of time, as they may suggest desperation in seeking credit.
Errors in credit report: Errors in your credit report can also impact your credit score. Some of the errors include incorrect personal information, wrongly reported late payments, or inaccuracies in account balances and credit limits. Such mistakes can lower your credit score by giving lenders a misleading view of your creditworthiness. Regularly monitoring your credit report and disputing inaccuracies with credit bureaus can mitigate the negative effects.
Regularly checking your credit score is important for staying on top of your financial health. You can easily get a free credit score and a detailed credit report on the Moneycontrol app and website. It helps you monitor your credit health and catch any errors or discrepancies early. Understanding how your credit score affects your financial opportunities, including loan approvals and interest rates, is crucial for effective financial management.
Your credit score range reflects your levels of creditworthiness. It encapsulates your credit history. It offers a detailed overview of your credit payments across various loans and credit institutions over time. For example, here’s a breakdown of the CIBIL credit score range:
NA/NH: This score stands for ‘No History’ or ‘Not Applicable,’ meaning you have no credit history or have not used credit facilities. It does not reflect your creditworthiness, and to establish a credit history, you may consider getting a credit card.
300-599: This credit score range is considered poor. It reflects missed payments on loans or credit cards. If your CIBIL score falls within this credit score range, obtaining a loan or a credit card can be difficult.
550-649: A CIBIL credit score range between 550 and 649 is classified as fair but may still pose difficulties in securing loans.
650-749: A credit score range from 650 to 749 is deemed good. It suggests that you have a positive credit history, and your loan applications are likely to be approved more quickly.
750-900: A credit score range within the 750 to 900 bracket is considered excellent, reflecting a strong credit history and timely payments.
Improving credit score is a gradual process that requires a disciplined approach. The score doesn't update immediately after a repayment, as credit bureaus usually refresh reports on a monthly basis. Any new activity may take 3-4 months to get reflected in your credit report. Patience and consistency are key to achieving noticeable improvements.
Pay your bills on time: To prevent late fines and adverse effects on your credit score, always make your credit card and EMI payments before the due date.
Control credit utilisation: Avoid maxing out your credit cards to keep your credit utilisation ratio low. If you make a large purchase, try paying off some of it before the bill is generated to keep the credit utilisation ratio in check.
Regularly review your credit report: Keep an eye out for errors or fraudulent transactions or activity in your credit report. File a complaint to get the discrepancy resolved at the earliest. You need to report errors to the credit bureaus directly.
Steer clear of excessive credit requests: Don’t apply for more loans or credit cards than necessary, and try not to apply more than once in a short period of time.
Keep a balanced credit mix: Having a variety of credit accounts and handling them responsibly can positively impact your credit score.
In conclusion, maintaining a high credit score is important to your overall financial well-being. Lenders use your credit score to evaluate your loan and credit card applications. In addition to improving your chances of approval, a higher credit score for loans can help you get them at better interest rates. By understanding what affects your credit score, you can take control of your financial health and work towards achieving a higher score.
Summary
Key factors affecting your credit score include length of credit history, repayment history, credit utilization, credit mix and others. By understanding how they affect your credit score you can gradually improve your credit score.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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