If you have started using Credit Cards or have taken loans, you will start building your Credit Score. To ensure your credit profile improves over time, you should always learn about the factors that determine your Credit Score. In today’s post, we are going to list them.
These are just the factors, I will go into the positive/negative aspect later on.
- Number of Credit Card and/or loan accounts you hold.
- Age of the Credit Card and/or loan accounts you hold.
- Number of times you have paid your bills/EMI on time.
- Available limit (cumulative) across all your credit card/loan accounts, also called Credit Utilization.
- Number of Credit Inquiries made in the last 30 days.
- Your profile details (name, address, email, phone number) across all accounts.
Having both loan accounts and credit card accounts on your profile is ‘better’ than just having ‘loans’ or just having ‘credit cards.’
Although most people don’t usually need a loan every now and then, it is good to open some BNPL Accounts like SlicePay, PayTM Postpaid, Amazon Pay Later, OlaMoney Postpaid, PostPe, etc. These will show up as Loan Accounts.
This is probably the most important factor, that determines your Creditworthiness. Never keep dues. Never be late in payments. Always pay on time.
If you are using too many Credit Cards and finding it hard to manage them, you can use apps like Cred to automatically fetch your Credit Card Bills and remind you about paying. Else, you can also use our FinTalks Credit Card Planner.
From the lender’s perspective, taking loans have a far stronger impact than taking a credit card. Hence, those who take loans (real-life loans) and pay dues on time, will definitely give a positive boost to their credit profile.
There is a difference between being eligible for a high limit, and utilizing a high limit. If you are being offered a high credit limit, that means you are ‘creditworthy’. However, if you exhaust your limit fully, that will give a negative signal.
The thumb rule is, to use only as much limit as you need. Try to keep it low. Although there is no magic number, most people agree that keeping around 70% of your credit limit ‘free’ at the time of bill generation, is a healthy practice.
Note that this 30% utilization is cumulative across all your credit cards, not across each card. Find your ‘total limit’ across all cards, and then find your 'credit utilization for the month. Keep it less than 30%.
Whenever you apply for a credit card or loan, your bank or the lender fetches your Credit Score from the Credit Bureau to assess your creditworthiness. (Exception: When you are getting a pre-approved credit card, this is not applicable). Now, each time a bank pulls your credit report, that is termed a Credit Inquiry.
Too many credit inquiries in a month are bad. There is again no magic number, but try not to do more than 3 new applications a month (here, month = last 30 days).
This is the biggest factor that will negatively affect your credit score. Use Credit Cards cautiously so that you don’t overspend. And pay your dues on time.
In case of an ‘extreme emergency’, you should at least pay the ‘minimum due’ amount. It will save you for that month, however, you will be charged a hefty interest in your next month’s bill.
Using your entire limit sends a signal that you may be too credit-hungry, which is a negative point. Try to keep your credit utilization across all your credit cards less than 50%, ideally less than 30%.
In case you have just 1 credit card, and that too with a low limit (say 15k), then you can use it totally, but pay off some bills to free up some limit. Ideally, you should have around 70% credit limit free at the time of bill generation.
Applying for too much ‘Credit’ sends a signal to your lenders that you are badly in need of money. So, you might find yourself getting declined. Maintain a healthy gap of a few weeks between two applications.
You can check your Credit Score as many times as you want. In fact, it is recommended that you regularly keep checking your credit scores to identify any mistakes in reporting and rectify them properly. It’s your profile, after all.
Before I end this post, I want to say this:
Your credit score is a cumulative outcome of all these factors, so, you cannot single-handedly quantify whether or not your credit score will increase or decrease. You can only predict whether or not your credit profile is on a positive note or negative note.
It may happen that even after doing everything right, your ‘Credit Score’ is not increasing. That is normal.
Take these factors as determinants only. Don’t directly link them with your ‘Credit Score’.