The Other day a friend of mine came up to me and said he could not quite figure out why his credit score had actually dipped where in fact he was regularly making payments on his EMI’s and cards and had not missed out or had a delayed payment on any of them. Well he is not alone! A lot of people in India are curious about how credit bureaus determine their credit score and what factors influence it.
Your credit score is calculated using a complex algorithm that takes into account various factors. While the exact formula may differ slightly between different credit bureaus, the factors considered are generally similar.
Here are some of the key factors that influence your credit score:
Payment History: Your payment history is one of the most important factors that determine your credit score. Lenders want to see that you have a history of making timely payments on your loans and credit cards. Late payments, missed payments, and defaulting on loans can have a negative impact on your credit score.
Credit Utilization: Credit utilization refers to the amount of credit you are using compared to the total credit available to you. Lenders want to see that you are not maxing out your credit cards or other lines of credit. Ideally, you should aim to keep your credit utilization below 30% of your available credit. Also do keep in mind in any month for whatever reason if your utilization goes above the 30% limit than it would be a good idea to pre pay on the card before the billing cycle date.
Length of Credit History: The length of your credit history is another important factor that is considered when calculating your credit score. Lenders want to see that you have a long history of responsible credit use. If you are new to credit, it may take some time to build up a good credit score. So its never a good idea to close out on a card. This might actually get your score down
Types of Credit: Lenders like to see a mix of different types of credit, such as credit cards, personal loans, and mortgages. Having a diverse credit history shows that you are responsible with different types of credit.
Recent Credit Inquiries: Applying for credit too frequently can have a negative impact on your credit score. Lenders may view multiple credit inquiries as a sign that you are in financial distress or may be taking on too much debt.
It's important to note that different factors carry different weight-ages when calculating your credit score. For example, your payment history and credit utilization are typically given more weight than other factors such as the types of credit you have.
Understanding how your credit score is calculated can help you take steps to improve it. By focusing on factors such as making timely payments, keeping your credit utilization low, and maintaining a diverse credit history, you can improve your creditworthiness and increase your chances of getting approved for loans and credit cards.
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