Your Experian credit score is a crucial factor that every lender looks at while screening your loan application. Therefore, it is essential to know what is a credit score and how it is calculated. While Experian may have its own algorithms to calculate your credit score, your payment behaviour is the most crucial element that your credit score is composed of.
When you do a credit score check, you will find that it ranges from 300 to 900, and the higher it is, the better it is for your creditworthiness. Let us look at what a credit score is and how it is calculated for a loan sanction.
What is a Credit score?
A credit score is a 3-digit number that summarises your credit history. It is calculated based on the credit details mentioned in the ‘Enquiries’ and ‘Accounts’ sections of your credit report, including your loans, credit cards, payment status, outstanding amounts, and days past due. The credit score you receive based on your credit habits will reflect your creditworthiness and play a crucial role in attracting a loan approval or rejection.
Most lenders require you to have a credit score of 725 or above. Ranging from 300 to 900, the closer it is to 900, the better your chances are to get loan approval. Therefore, before applying for a loan, do a free credit score check here and ensure that it matches the lender’s requirements.
How Your Credit Score is Calculated?
Your Experian credit score is calculated based on five factors, each having its weightage:
- Payment History: Your payment history is one of the most crucial factors used to calculate your credit score. If you repay your credit card bills and loan EMIs on time, your credit score will improve. If you delay or miss your payments, it will eventually reduce your credit score. Therefore, you should be consistent with your payments to achieve and maintain a high credit score.
- Credit Utilisation Ratio: Also known as credit exposure, your credit utilisation ratio is another important factor that calculates your credit score. It is the credit amount you use up from the credit limit available to you. Ideally, you should not use more than 30-40% of your credit limit. If you use a higher credit limit, you are perceived as a credit-hungry borrower, and your credit score is reduced. As a result, when lenders do a credit score check for your loan application, they see you as a high-risk borrower and reject your loan application.
- Credit Duration and Type: A long credit history indicates that you have experience in handling credit. It is the time that has passed since you got your first credit card or opened your first account. That is why we advise you to start building credit as early as possible, as it comes in handy when you apply for a loan.
The type of credit in your credit profile also plays a vital role while calculating your credit score. Different types of credit, including secured and unsecured loans, long-term and short-term lines of credit, credit cards, and other accounts, present in your credit report suggest that you have experience handling them with responsibility. You need to have a good balance of secured and unsecured loans to bring diversity to your credit profile.
- Debt to Income Ratio: Your DTI ratio indicates how much you depend on credit and whether you can handle more loans or not. Ideally, your total loan EMIs should not consume more than 30-40% of your monthly income. If you are already indebted heavily, your credit score may be reduced, and lenders would not want to give you more credit.
- Hard Inquiries: Hard inquiries are another factor that credit bureaus use while calculating your credit score. The lender pulls out a hard inquiry on your credit report whenever you apply for a credit card or loan. If multiple inquiries are made within a short time, the lender may perceive you as a credit-hungry borrower, which may negatively affect your credit score. Therefore, avoid applying for several loans within a short period. Research and compare well and then apply for a loan.
Remember that your Experian credit score is one of the most crucial factors that lenders consider while screening your loan application. Therefore, take the necessary measures to achieve and maintain a high score. You can do that by following simple steps, like making your payments on time, maintaining a low credit utilisation and DTI ratio, diversifying the credit profile, and retaining old accounts. With a high credit score, you can negotiate a better loan deal with your lender and save money over time. Do a free credit score check
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