What Affects Your Credit Score?
A quick look at the factors affecting the credit score:
- Payment History: This is the most important factor to impact your credit score. If you miss your EMIs, delay the payments or have late payment charges, it will bring your credit score down.
- Credit Utilisation Ratio: It is the amount of credit you use against the total limit of credit you have. Ideally you should use 40% of your credit limit. A low credit utilisation ratio means you can manage your credits. A high credit utilisation ratio brings down the credit score.
- Credit History: A long credit history is beneficial. It gives the financial institution how you have managed your credit. An inside tip is to keep your old credit cards open, as they have a long credit history.
- Good mix of loans: It is advisable to have a good mix of secured and unsecured loans. A home loan is a secured loan and a credit card an unsecured loan.
What to Avoid for a Good Credit Score?
- Avoid missing out payments or late payment of dues.
- Filing for bankruptcy is disastrous for your credit score.
- Don’t take multiple loans or credit cards within a short duration.
- Do not use your credit card to its maximum limit.
- Don’t close a credit card with outstanding balance.
- Do not have a higher count of unsecured loans.
Credit Score Analysis
A credit score ranges between 300 to 900, 900 being the highest. You can change your credit score with good financial habits. Let’s understand different credit score ranges.
- NA/NH - You need credit history for credit score. When you have no credit history, the credit score is Not Applicable (N/A) or No History (N/H).
- 300 - 550 - This is a bad score range indicating skipped payments and unpaid dues.
- 550 - 650 - This is an average score range and needs improvement.
- 650 - 750 - This is a good score range. You will get that loan approved, but probably not a cheaper rate of interest.
- 750 - 900 - This is the best score range. Not only you will get a loan, but can also negotiate the interest rate.
Credit Score Inquiry
You can check your credit score for free. When you check your own Credit Score it is known as a ‘Soft Inquiry’. The good thing is that it doesn't impact your Credit Score. Which means you can very well work towards improving your credit.
When a financial institution or lender checks your Credit Score, it is known as a ‘Hard Inquiry’. Each time a bank checks your score, your score dips a little. Hence, a good idea would be, to not apply for a loan to many banks at once.
When Should You Make a Credit Score Inquiry?
An annual check of your Credit Score is recommended, to make sure it is accurate. You wouldn’t want a minor error to prevent you from getting your loan or best available terms on a loan.
You should also check Credit Score:
- Before applying for a loan.
- Before applying for a job, in case your employer keeps a track.
- To guard against identity theft, where someone uses your personal information to commit a fraud.
Improving your credit score is a gradual process, so you should not lose patience. Even if you don’t see the changes immediately, you will certainly reap the benefits in the long run.
