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top 5 factors that affect your credit score

top 5 factors that affect your credit score

December 1, 2021
5 min read
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a credit score is one of the most important factors that determine whether you will get credit approval or not. the lenders use the credit score and credit report to determine the risk of giving money to a borrower. 

what is a credit score and why is it so important?

a credit score is a 3-digit numerical representation of the creditworthiness of an individual. the credit score ranges from 300 to 900. the credit report and credit score are prepared by credit bureaus by collecting your credit, debts, and repayment history from banks and financial institutions. the credit score is mostly used by credit card companies, mortgage, and loan bankers, auto dealers, etc. to check your creditworthiness before deciding how much money they should loan you and at what interest rate. your credit score can also be scanned by the insurance companies and landlords to determine how financially responsible you are. check your credit score on CRED

why is it important to maintain a good credit score?

a good credit score can help you get loans easily as banks and lenders would trust your creditworthiness. when banks see an applicant with a good credit score, they are assured that their money is risk-free and that you would repay the loan on time. also, if your credit score is closer to 900, the banks would offer you the best credit cards, and also you can get loans at lower interest rates. 

what are the factors that affect your credit score?

your credit score is the mirror of whether you have a history of financial stability and responsible credit management. here are some of the top 5 factors that affect your credit score:

1. your payment history

when someone lends you money, the biggest question on their mind is whether you will return it on time or not. since lenders use credit score as a measure to determine your creditworthiness, it becomes the most important component of your credit score. if your credit score is high, you can be trusted to repay your loans on time. your payment history includes details such as:

  • have you paid credit card bills and loans on time? the timing of your credit card bill payments is very important. every time you make a late payment, your credit score is cut.
  • in case of late payment, how late were you (30 days/60 days/90+ days). the later you are, the worse it is for your credit score.
  • have you defaulted on any payments? this is a red signal to potential lenders that you may not pay your dues on time.
  • public records such as - charge-offs, debt settlements, bankruptcies, foreclosures, lawsuits, wage garnishments or attachments, liens, or public judgments - can severely damage your credit report and credit score.
  • you can rebuild your credit score by paying your dues on time. 

2. credit utilization ratio/debts owed

your credit score is made of various factors. for example, you might be making timely payments for all your dues, but what if you are about to reach a breaking point? hence, your credit utilization ratio is another important point that determines your creditworthiness. the credit utilization ratio shows how much debt you have compared to your available credit limits. so when it comes to credit utilization ratio, less is better. for example, if your credit card limit is 5 lakhs, try to limit your credit utilization ratio to less than 30%. however, don't assume that owing nothing can be better either. you should use your credit a little bit and make your payments on time to show the lenders that if you borrow money, you are responsible and financially stable enough to pay it back.

3. tenure of credit history

the age of your oldest account and the age of your new accounts are taken into consideration to find the average age of all your accounts. having a long credit history can help prospective lenders see the history of your financial stability and responsible credit management. but make sure your credit history is not marred by late payments and other negative items. as long as you pay your bills/dues on time and don't owe too much, having a short credit history would do no harm. 

4. new credit

the number of new credit accounts you have also affects your credit score. your credit report includes information such as - how many new accounts you have applied for recently and the timeline of the latest accounts you have opened. whenever you apply for a new line of credit (such as credit cards, education loans, home loans, personal loans, car loans, etc.), lenders make a hard inquiry to check your credit information. the hard inquiries can cause a small and temporary drop in your credit score. because it's assumed that you have a high percentage of credit accounts and you could represent a greater credit risk. it has been seen that people who are experiencing cash flow problems, apply for too many new debts which they may or may not pay back on time.

5. credit mix 

credit mix - the types of credit you own, such as credit cards, store accounts, installment loans, and mortgages, etc., also constitute an important factor that affects your credit score. the credit score is also given after looking at how many total accounts you have. however, the percentage of credit mix in determining the credit score is very small, so you should not worry if you don't have accounts in each of these categories. also, do not open too many new accounts just to increase your mix of credit types as it would decrease the average age of your credit history and therefore your credit score may also see a drop.

what's not included in your score?

your credit score is not affected by the following information:

  • your marital status
  • your age (though some credit bureaus may consider this)
  • your race, color, religion, nationality
  • your salary and income
  • your employment or business history (though some lenders may consider this)
  • your address 
  • child/family support obligations
  • any information that is not included in your credit report

you can check your credit score and credit report for free on CRED.