Want a good credit score? Here are 8 key factors you must know

Credit score is an important financial metric that represents your credit worthiness. It affects credit facility accreditations, credit card availability, and even flat rentals. It uses various elements, including repayment history, credit utilisation, credit history duration, the type of credit and the number of inquiries made recently. The factors that define the above-mentioned score are listed below. Understanding these qualities allows you to take steps towards having a healthy credit profile.

Understanding credit score

Credit score is a numerical value representing one’s ability to manage loans or borrowed funds alongside interest. It gives the lenders an idea of your ability to repay the money which has been borrowed. The method shows credit scores of 700 and above indicate lower risk to the lenders, meaning that more profitable loan terms and cheap interest rates are accorded. On the other hand, a low credit rating can restrain your borrowing opportunities or lead to higher spending.

Factors affecting credit score

1. Payment history: The ability to repay the loans and credit card payments on time, is one of the biggest factors determining credit score. The existing late or missed payments have a negative impact though the on-time payments help to raise them, and regular, constant payments can even enhance the credit score.

2. Credit utilisation ratio: This is the percentage of the total available credit that you are utilising. A higher credit utilization ratio can negatively impact the credit score as it indicates that you might not be managing your credit well. Utilisation of 30% of the total available credit is considered ideal. 

3. Errors in credit reports: You must be mindful of any errors reported in your credit report. If any information such as EMI default, loan record, number of credit cards, and so on, is incorrectly reported,  it will adversely impact your credit score. To avoid this, you must track your credit report regularly and report any errors to the concerned credit information bureau as soon as possible.

4. Duration of credit history: The authenticity of newly established credit also impacts your score due to the age of credit accounts. However, a longer credit history means you are able to manage credit and can therefore pump up your score. However, such elements may initially be lacking and may take some time to develop especially by the new borrowers.

5. Hard and soft inquiries: A hard inquiry occurs when a lender checks your credit history for approving loans, credit cards, or a line of credit- which pulls down your score. Soft inquiries, which appear on your credit report when someone checks your credit for non-lending purposes, do not impact your credit score. These include checking one’s own credit or pre-approval request.

6. Credit limit increases: You should agree if your credit card company decides to increase the credit limit due to proper usage of credit cards. A greater limit causes a reduction of the credit utilisation ratio hence a good score.

7. Frequent new credit accounts: Applying for credit cards at different places within a span of a few months is also a bad sign that could pull your credit score down. Borrowers may consider it to be a higher risk of overburdening your credit.

8. Credit mix: A good credit score means a balance between secured and unsecured credit facilities. Credit quality shows responsibility and having a few more bins filled with different kinds of credits looks better.

Advantages of good credit rating

• Quicker approvals of loan and credit cards
• Get low interest rates on personal loans.
• Improved perks and benefits from credit cards.
• Higher credit limits
• Reduced loan processing fees.

Conclusion

Your credit score for that matter is far from being a mere integer; it is an indication of your responsibility as a financial citizen. Know which inputs affect the score and go for forceful measures to raise it. Paying all your bills on time and ensuring that you do not exceed 30% credit utilisation and expanding the credit portfolio are the best strategies to enhance the credit score.

You should know that when it comes to finance, a good rating results in improved rates as well as faster approvals. Do not sit back and let time fly by without engaging yourself financially; instead, read and plan for the future.