Repayment history, credit utilisation and more: 4 important factors that influence your credit score

Credit scores are determined by a variety of factors, each carrying a different level of weight. While the exact algorithms used by credit scoring models are unique and vary from entity to entity, there are some key factors that influence your credit score. 

Key factors which influence the credit score:

Repayment history: It reflects whether you have paid your credit accounts on time. For instance, late payments, defaults, bankruptcies, and other negative marks can lower your score significantly.

Credit utilisation ratio: This is the ratio of your credit card balances to your credit limits. Using too much of your available credit can indicate financial stress and may lower your score. Ideally, you should aim to keep this ratio below 30%.

Types of credit: Lenders like to see a mix of different types of credit, such as credit cards, instalment loans, and collateral. This indicates your ability to manage various types of credit responsibly.

New credit: Opening several new credit accounts in a short period can indicate financial distress and may lower your score. Similarly, multiple hard inquiries from lenders within a short timeframe can also have a negative impact.

Notably, different credit scoring models may weigh these factors differently, and lenders may also have their own criteria for evaluating creditworthiness. 

Nevertheless, focusing on maintaining a positive payment history, keeping credit card balances low, and only applying for credit when necessary are generally good practices for maintaining a healthy credit score.

Frequently Asked Questions (FAQs):

Which is the most vital factor that influences your credit score?

Repayment history is one of the most vital factors. It reflects whether you have paid your credit accounts on time.

What is credit utilisation ratio?

This is the ratio of credit card balances to your credit limits. Exhausting too high of your available credit indicates financial stress and may impact your score adversely.

Do debt levels also impact the credit score?

Yes, they do. The amount of debt, particularly in proportion to your income, does have an impact on credit score.

Does applying for loan too many times impact the credit score?

Each time you apply for credit, a hard inquiry is recorded on your credit report. While one or two inquiries may have a minimal impact, multiple inquiries within a short period can impact your score.

Does diverse credit mix affect credit score positively?

Having a diverse mix of credit types such as credit cards, auto loans, and mortgages can influence your score positively.