Credit Score – What it Means?
In simple words, Credit score is a 3-digit number that determines your credit worthiness. Money lenders, banks, and NBFCs check your credit score as the foremost item while considering your application for a loan or any instrument of credit. A credit score represents your financial health and builds your profile when it comes to while dealing with debts and payments.
Now that you know what a credit score actually means, you would be surprised to know the factors that can affect it negatively. We understand that you might be unaware of some of these and if you are, read on.
Factors That Affect Your Credit Score
Here are 5 biggest factors that negatively affect your credit score, and how a negative credit score can make your application look bad and be rejected by the lender.
Delayed Payment History
Your payment history determines a major chunk of your credit score. If you have had a credit card or a loan in the past, we are certain that you know this already. Simply put, how timely you pay your bills and whether or not the due amount has been paid in full has a great effect on your credit score.
Serious payment issues like regularly missed payments, charge-offs, foreclosure or bankruptcy can destablise your credit score making it almost impossible to get your application approved for any credit instrument in the future.
The best way to counter this issue is to always be punctual with the payments and never miss one. Concerned about what your payment history looks like right now? Check your Credit Score for free on our website at Clix Capital once you have finished reading.
Exponential Debt Level
The amount of debt you have taken is yet another factor, after payment history that affects your credit score. This debt is also called credit utilization ratio and refers to the amount of debt you have used to the amount of debt you have been assigned or extended. Breaking it down further, let’s say, if you don’t have any loan and just have a credit card with a credit limit of INR 1,00,000 against which you’ve spent INR 30,000; your credit utilization ratio stands at 30%.
It’s best advised to keep the credit utilization ratio under 30% or less as that keeps your credit score healthy without creating an unnecessary burden on you to pay additional interest or pay heavier amounts as EMIs.
The reason why the amount of debt has a major impact on credit score is because it goes on to show whether you’re a high-risk or low-risk borrower. Naturally, someone with a low debt amount would be considered as a low-risk borrower while applying for a personal loan.
Multiple Credit Enquiries
Every time you apply for a credit instrument like a personal loan or a credit card, the requests are considered a credit enquiry and are reflected on your credit report. This record is usually accumulated for about two years and showcases every time a request for a new credit instrument has been made.
Generating too many and frequent credit enquiries can your credibility with the lenders and is considered to be a risk factor.
Type of Credit
Credit mix is also an important part of your credit score. There are two major types of credit accounts– Revolving and Installment. Revolving credit covers credit cards.
2) Installment credit covers a majority of loan types which includes personal loan, education loan, auto loan etc.
Your application has a higher chance of getting through with the lenders if your credit report shows a mix of both debts in your report. This shows that you’re responsible enough in managing both.
Credit age or credit history is another factor that has a bearing on your credit score. Simply put, credit history is just the time that has passed since you have been an active borrower or credit user. Credit age is ascertained looking at the following points:
- The age of your oldest credit account
- Average age of your combined credit accounts (calculated by adding up the age of all your credit accounts divided by the number of credit accounts you hold)
The older your credit accounts are, the more it helps your credit score. It is always advised not to close your old credit accounts unless you decide to not use the services anymore.
Know You Credit Score
If you’re still concerned or worried about what your credit report says about you, click here to check your latest credit report for free. You may be eligible for a pre-approved personal loan offer!
You can also reach out to us at 1800-200-9898 (toll-free)