What are the Factors Deciding your Credit Score?

A credit score is nothing but a three-digit number that lenders use to determine how likely a borrower is to pay back debts. Since your credit or CIBIL score plays a vital role in your loan or credit card application process, you must learn about the factors affecting your overall credit score. 

Here in this article, we will discuss the major factors deciding your credit score, what isn't in your CIBIL score, and how you can improve them. 

First, let’s take a look at what factors can decide your credit score. 

Not making repayments on time       

Your credit score, to a large extent, is influenced by your repayment history. That means even one missed payment can negatively impact your credit or CIBIL score. Before approving your loan or credit card application, lenders want to make sure that you are a creditworthy borrower and can pay back the debts on time. 

Please note that repayment history accounts for 30% of your credit or CIBIL score. 

Applying for multiple credits

The secret to a high credit score is credit mix, or in simple words the diversity of your credit accounts. Having multiple credit card accounts, which includes car loans, credit cards, and student loans, can show the lenders that you are capable of managing your finances efficiently. 

Not maintaining a favorable Credit Utilization Ratio

The credit utilization ratio stands for the amount of credit you utilize from the total credit limit available and it accounts for 30% of your credit score. In order to maintain a good credit or CIBIL score, you must keep your credit utilization at 30%. Lenders prefer lower credit utilization, as a high credit exposure means more risk. 

Closing a credit card account

Your credit score depends on various things like- how long you have been using credit, the average age of all your accounts combined when you opened your first account, etc. Remember, long credit history works great, but short credit history is good too if you have cleared off your debts on time.

Experts always recommend leaving credit card accounts open, even if you haven’t used them in a while. The account’s age, alone, can help in improving your credit or CIBIL score. 

Errors in your CIBIL report

This one is quite common. Errors in your credit or CIBIL report can include mistakes in personal information or wrong balance inputs. These things can leave a bad impact on your credit score and report, which makes it important for you to keep a regular track of your credit history and quickly rectify the mistakes.

Paying your minimum dues only

Rather than paying the total amount due on your credit card, if you continue paying the minimum due, your credit score will be affected. Additionally, it will to an increase in the interest rates. Therefore, you must make sure to repay your bills on time and in full. 

What isn’t a part of your credit score?

While applying for a loan or credit card there are a few additional information required by the bank that has no bearing on your credit score or report. They are: 

• Marital status
• Age 
• Salary
• Employment history 
• Address

How to improve your credit score?

Improving your credit score may require a lot of time and effort, but developing responsible financial habits now can surely take you a long way. For starters, you can get a copy of your credit report to get a clear picture of what is in your credit history. Next, identify the zones of improvement and work on them.

Below are a few tips on how you can improve your credit or CIBIL score. 

Make timely bill payments: As already mentioned payment history is one of the most important contributing factors to credit score; paying all your bills on time is a must-do to improve your CIBIL score

Rectify errors on your credit report: Your credit score could suffer because of inaccurate information in your credit report. Regularly monitor your credit reports to make sure no inaccurate information appears. If you come across any errors, try to fix them as soon as possible.

Avoid multiple credit requests: Avoid asking for new credit every now and then to lower the number of hard inquiries in your credit report. That’s because hard inquiries stay on your credit report for two years, though their effect on your credit score reduces over time. 

Pay down debt: Reducing your credit card balances is perhaps one of the best ways to minimize your credit utilization ratio. It is also one of the quickest ways to boost your credit or CIBIL score. 

The Bottom Line

There’s no denying the fact that your credit or CIBIL score is crucial to getting your loan and credit card applications approved. But that doesn’t mean you have to strictly adhere to the scoring guidelines to achieve a high credit score. All you have to do is, manage your credits responsibly, and your credit score shall never experience a downfall.