Credit score being a measure of a person’s capability to pay back a debt serves as a key tool for banks and NBFCs to make loan offers. A good credit score always puts you in a good position when it comes to availing attractive loan offers. Below-detailed are factors used in calculation of credit score:
Payment History : High Impact
Your payment history plays a key role in determining your credit score. If you’ve been regular in payment of your loan EMIs, credit card bills etc., you’re considered a responsible borrower and a low risk for the lenders. Such behaviour also attracts preferential interest rates and quicker loan approvals.
Credit Utilisation Ratio : High Impact
Second-biggest factor in calculation of credit score, CUR refers to the total credit used by you in proportion to the total credit limit available to you. You can calculate it by dividing your total outstanding balance by overall available credit limit. It’s recommended to keep it in the vicinity of 30%.
Credit’s Age – Medium Impact
A longer credit history shows experience and responsibility in handling credit. Having handled credit responsibly in the past and continuing making timely payments positively impacts the credit score. That’s the reason it’s always better to use cards with a longer history than newly-acquired ones.
Credit Mix : Low Impact
Having a healthy mix of unsecured and secured credit can potentially improve your credit score. Although its impact isn’t as strong as the utilisation ratio and payment history, borrowing only one credit type in big quantities is not considered good by lenders. Other than these, hard inquiries are also factored-in while calculating credit score.