Credit Scores are critical in today’s financial life. Credit Scores are a three digit number that is based on the information provided from a credit report. Whenever you apply for a new credit account, investors usually track your credit score to monitor your worthiness thereby. If you have good credit score then that helps in many ways it helps you to buy your dream home or even if you are planning a new business and need credit for that, good credit score is important. As a good credit rating/score would help you to fulfill your dreams a bad credit score puts additional challenges upon you. An ideal credit score should range from 300-850 that are based on FICO. If industry scores are to be considered, it may range from 250-900. Typically, a higher credit score depicts that you would be able to pay your loans on time and as was agreed.
Many factors are affecting your credit score. Some of them are discussed below:
- Credit history
One of the most critical factors affecting credit score is Credit history and credit card uses . Credit history does not necessarily always take into account the period for which you have had access to credit. It also considers the payment patterns as well as credit applications. So, while it is important to have a long history of good credit to increase your score it is also necessary not to miss your payments or apply for a new credit card always as that would decrease the ratings.
- Credit utilization limit
A high credit utilization limit affects your credit report. A high credit utilization means that debt is rising with time, which thereby creates a negative image on the credit bureau and thus makes the report negative. You can calculate your credit utilization with a method of the dividing total unpaid amount with your credit limit. Also, if someone’s credit utilization tends to reduce with time or is considered low, it depicts that your repayment burden is sinking and will, in turn, can increase credit score.
- A High percentage of unsecured loans
Another factor affecting your credit score is a high percentage of unsecured loans. If unsecured credits like personal loans or credit card expenditure are high, that would negatively impact your CIBIL scores. Banks or financial institutions consider high unsecured loans as a sign of mismanagement of finances of the person and they are very cautious in providing loans to such persons. But if the loans are secured ones, the credit score tends to go up.
- Payment History
Another important factor affecting Credit scores is the payment history. It is always important to have a history of on-time payments on an excellent credit score as missing payments could hurt the ratings badly. So the longer a bill goes unpaid; it affects the missing payments. Thus, more delayed a payment is more negative would be the score. A 30-day late payment would create a lesser effect on scores than a 60- or 90-day late payment. How much a late payment would affect your credit may also vary considering how much you owe. So, if you start making timely payments and try and reduce the amount owed, then inevitably the impact on your scores would tend to dimish with time.
- Various Loan Application
As and when you look for and apply for a new credit that may be a credit card or a loan etc. the bank or the financial institution would necessarily conduct an in-depth inquiry on your overall credit/Cibil report to check various terms of credit history. But if you apply for multiple loans, there would be too many of such inquiries which would, in turn, affect your credit score negatively. Since you are applying to various institutions simultaneously, you would be seen as a credit hungry person. Many loan applications would depict that your loans would be going up in the near future and so it would be difficult for you to fulfill your upcoming debt obligations.
- Types of Credit used
Though this factor does not influence the credit score to a large extent but is still considered affecting 10% of your credit score. To improve your credit ranking prefer using different cards and maintain credit accounts significantly. There are types of credit accounts like Revolving account, Instalment account, Open accounts. Revolving accounts are the ones where you make payments each month but that depends upon how much you spend. An example of revolving accounts is Credit cards. Another is Instalment account wherein you need to pay a specific amount each month that is fixed until the balance gets paid off. Example of this would be a mortgage, vehicle loans. The last one is Open accounts where the amount is not fixed and may differ, but you need to pay what you owe in full each month.
