Your Credit Score is a numerical expression of your creditworthiness. It is becoming increasingly important. Most lenders today look at your credit score before deciding on sanctioning you a loan.
Your credit score basically is a number ranging from 300 to 900, calculated basis your history of credit cards and loan usage. Looking at the score, the lender may be able to understand some of the risks they are taking by lending to you.
The credit score comes with a detailed credit report summarising your borrowing history. There are several attributes that decide your score. Let's take a look at them.
This is the biggest factor in having a good credit score. A good track record of making payments on time is a key decider of a good Credit Score. This is not just for credit cards, but across all instruments of loans like home loan, car loan or any other. Late payments, settlements, and defaults take your score down and it may take a long time to climb back if not corrected on time.
This is mainly determined from how you use your credit cards and has very high impact on your score. Over-utilisation of your credit limit can take your score low. You should ideally not use more than 20 per cent to 30 per cent of your credit limit to maintain a good score on this parameter. You also need to make sure that you clear the entire credit card balance, else it gets carried on to the next statement, thus reflecting on your credit utilisation score again.
Age of Credit Lines
This refers to how old your loan accounts and credit card accounts are. Longer credit lines mean that you've been a responsible borrower and have been paying your dues. This has medium to high impact on your overall score. For example, if you have a credit card account for several years, it means that you've been able to repay your dues and that is why your account is still active.
Number of Active Accounts
This does not affect your credit score as severely as the other parameters, but still forms a part of the calculation. It consists of a detailed list of all accounts active, be it loan or current or savings. It also takes into factor any negative accounts that may have been shut down due to non-maintenance of balance.
There are two kinds of credit enquiries, one hard and the other soft. Hard enquiries are made by banks and financial institutions. Too many recent enquiries mean you're desperate for credit and this will have a medium impact on your score. Soft queries are ones initiated by you to check your own score and do not have any impact on your score.
(Adhil Shetty is CEO of Bankbazaar.com)
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