New Delhi: Do you often utilise 80 to 90 percent of your credit limit? This practice can lead to future complications. When you use such a significant portion of your credit limit, your Credit Utilization Ratio (CUR) increases, adversely affecting your credit score. A poor credit score can make it challenging to secure loans in the future. Your credit score is a numeric reflection of your creditworthiness. It shows your ability to manage and repay loans. Credit Score ranging from 300 to 900, with 700 to 900 is considered good and below 600 is considered poor.
Factors Influencing Credit Score
1. Repayment History
The most crucial factor influencing your credit score is your repayment history. According to Experian, payment history plays the most significant role, accounting for 35% of your credit score. Timely payment of EMIs and loan installments enhances your credit score, while delays or defaults can significantly lower it. It’s crucial to ensure timely minimum payments if you have loans.
2. Credit Card Usage
Another critical factor impacting your credit score is how you use your credit cards. Responsible use, such as maintaining a low Credit Utilization Ratio (CUR), is beneficial. CUR indicates the proportion of your credit limit that you use. Experts recommend keeping CUR below 30% of your total credit limit. For instance, if your limit is Rs 1 lakh, try not to exceed Rs 30,000 in expenditures.
3. Effects of High CUR
A high Credit Utilization Ratio suggests a reliance on credit to meet expenses, potentially marking you as a risky borrower to financial institutions. This factor contributes 30% to your credit score.
4. Credit Report Errors
Despite timely payments and balanced credit utilization, your credit score may suffer due to errors in your credit report. Regularly checking your credit report on platforms like TransUnion CIBIL, Experian, CRIF High Mark, and Equifax can help identify and correct any mistakes. Errors negatively impact your credit score as the report details all your loans and repayments.
5. Credit Mix
Credit mix refers to the variety of loans you manage, including personal loans, car loans, credit cards, student loans, and mortgages. Maintaining a diverse credit mix indicates your ability to handle different types of loans concurrently. This factor contributes 10% to your credit score.
6. Credit Age
The length of your credit history, or credit age, is also crucial for your credit score. This average age considers all your existing credit accounts from their opening dates. A longer credit history, especially with older accounts, is viewed favorably by credit bureaus. Opening new accounts can reduce your average credit age and potentially impact your credit score.
By understanding and managing these factors effectively, you can improve your credit score and strengthen your financial profile for future borrowing needs.
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Credit Score: The length of your credit history, or credit age, is also crucial for your credit score. This average age considers all your existing credit accounts from their opening dates. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
