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Friday, December 1, 2023

What are the 7 Factors that Affect a Credit Score?

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Every financial institution verifies the credit score of an individual before approving their loan request or credit card application. This score signifies the creditworthiness and financial strength of a person. This is why applicants availing loans or credit cards need to be aware of the credit score factors. Borrowers can keep reading to learn about these factors that affect the credit score of a person. 

7 Factors affecting the credit score of an individual

Mentioned below are seven crucial factors that are responsible for affecting the credit score of an individual:

Repayment history

Basically, the credit score of an individual reflects their past payment records. Any records regarding payment defaults in EMIs or credit card payments will negatively impact the credit score of a person. Also, longer the outstanding payments remain unpaid, harsher is the effect it will cause on the credit score. 

Thus, when a lending institution offers credit, its main question will be whether the borrower will be able to return it or not. As lenders use the credit score to evaluate a person’s creditworthiness, it becomes essential to keep it healthy. Having a higher credit score increases the chances of getting any loan or credit card approval. 

Credit Utilisation Ratio

The credit utilisation ratio is one of the most vital credit score factors affecting the creditworthiness of an individual. This ratio signifies the amount of credit used against the total pre-determined credit limit. To maintain a proper credit score, the recommended credit usage ranges between 30% and 50% of the total available credit. Credit card usage crossing above 50% tends to decrease the credit score.

Duration of credit history

Financial institutions keep a detailed report regarding the credit history of an individual. A long credit history helps potential lenders to see the history of a borrower’s financial stability and credit management. If a borrower retains a long and positive credit history, it will help boost credit score. 

However, they have to ensure that their credit history does not hold any late payment records or negative information. A short credit history can also be ideal provided the borrower makes his/her payments on time. 

Discrepancies in a credit report 

Credit reports comprise detailed information about the current and past credit accounts of a person. Even a minor discrepancy in the credit report can harm the credit score. Hence, individuals need to visit the official website of CIBIL and verify their credit reports periodically. 

By doing so, they will be able to detect errors or wrong information on the report and convey the same to the credit reporting company for correction. The errors include incorrect details, wrong balance inputs, account reporting mistakes, etc. which cause negative effects on the credit score. 

Credit mix

Individuals need to be practical while availing loans from financial institutions. According to financial experts, holding a proper balance of secured loans such as home loan, loan against property, etc. and unsecured loans like business loans, personal loans, etc. helps increase credit score. Furthermore, having a healthy credit mix specifies that the concerned person can manage various types of loans sensibly. Thus it helps in improving the credit score and credit history.  

Credit inquiries

Financial institutions check the credit history of an individual before approving their loan request. Credit inquiries occur when borrowers conduct a thorough research about different loan offers on multiple websites even when they are not applying for them. 

However, lenders consider these inquiries as a sign that the person is planning to avail credit. These multiple loan inquiries are responsible for affecting the credit score as lenders judge a person’s creditworthiness as per the credit needs. 

Closing old credit cards

Another factor responsible for affecting the credit score of an individual is old credit cards. Although closing old credit cards acts as a responsible behaviour, eventually it causes a negative effect on the credit score since it will harm the credit utilisation ratio. So, keeping the old credit cards active makes sense as it helps in lengthening the credit history.

Having a crystal-clear idea about the credit score factors may help an individual retain a healthy credit history alongside maintaining a good credit score. Doing so will increase their creditworthiness and facilitate the lending process so that they can get fast approval on loans and credit cards. 

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