IndiaLends Advisory

By IndiaLends Advisory

Jul 05, 2018

Things You Didn’t Know Affects Your Credit Score

Credit Score

A credit score is a three-digit numeric summary of your entire credit history prepared by credit bureaus from the information that financial institutions and lenders. But why is it important to maintain a good credit score? Why do we hear about improving/increasing it all the time? These are some few questions which might be jostling your mind. Right? Turns out, that credit score is the most imperative factor considered in determining your creditworthiness and getting the best Personal Loan interest rates. A good credit score means less interest on your advances and vice-versa.

Credit score has a major impact on your financial life, having a good credit score means potential savings on your money which you could have given away as interest charges. A credit score is a delicate number and can be affected by even small mishappening on your part. While there are many ways which can directly give a dent to your credit score, like defaulting on payments, paying the only minimum balance due etc. There are other things which you didn’t know can hold you back from maintaining a good credit score.

 

To help you out in this process, and cease you from things which may affect your credit score. We have garnered a list of some things which might affect your credit score, things you didn’t know about and how you can take preventive measures against it.

 

Credit utilization limit

A credit utilization limit has more effect on your credit score then you’re aware off. A high credit utilization limit gives a negative hunch to your credit bureau and can affect your credit score over time. Credit utilization limit is calculated by dividing the total outstanding amount with the person’s credit limit. In a nutshell, it is the ratio of your credit card balances to the credit limit. For instance, if your balance is ₹30,000 and your credit limit is ₹100,000 then the utilization of your card is 30%. It’s important to maintain a credit utilization ratio between 20-30%, as it is favored all over by financial institutions and lends and gives a positive impression on the person’s credit limit.

 

Multiple loan inquiries

Any financial institutions or lenders look into your credit history before availing you a credit or an advance. If you’ve done multiple inquiries in the past, then it will be reflected on your credit report. Hence, affecting your credit score. Financial institutions and lenders will count your inquiry as a hunger for loan and might refrain from giving you advances. There is generally two types of inquiries done, hard and soft inquiry. When a hard inquiry is conducted it might lower your credit score by fewer points, or may negligibly affect it.

 

Make sure you apply for a credit card only if needed, if you do it otherwise; your credit score will be affected. Also, refrain from making too many credit card applications within a short time frame, as it can have an adverse effect on your credit score

 

Not checking your credit report

No one’s flawless, be it your lending institutions or credit bureaus, which means it’s possible that mistake has happened in your credit report which you’re not aware of. Any error on the part of the bank or financial institution can affect your credit score. Look for any missing payments that you made recently but not shown in your reports. Plus, in the times when credit card frauds and thefts are becoming prevalent. It becomes important to check one’s credit report and inform the respective financial institutions to take corrective measures against any errors.

 

Paying late

Payment history accounts for thirty-five(35%) of your credit score. It means that it plays an imperative role in deciding one’s credit score. If you have a habit of consistently missing out on your payments then you’re in to witness a downturn in your credit score. Even if you’ve missed out on the single payment of your EMI, that would reflect on your credit card report. Hence, putting a negative effect on your credit score. It’s advisable to never miss out on a single payment and always make payments duly on time.

Related article: Late Credit Card Bill Payment: Everything You Should Know

Settling an account

A settled account gives a negative remark in your credit report. Settling your debt means that the creditor has given up on recollecting the debt amount from you. Financial institutions or lenders don’t want to see the word settled on your credit report. It’s an agreement in which the financial institution and the borrower have agreed to settle on an amount, less than the owed amount. Your credit score will surely take a hit from this. This is one of the worst things that one can have on our credit report.  

 

Increasing your credit limit frequently

An increased credit limit on your credit card has many benefits like the flexibility of availing more funds, but this can also affect your credit score if not done wisely or judiciously. When you frequently request your respective financial institution or lender to increase your credit limit, your credit reports are pulled out and a hard inquiry is done. You must be able to guess what happens when too many hard inquiries are done. Also, frequent increase in your credit limit could be seen as a sign of depending on the bank’s advances to manage expenses, and it might raise a red alert; affecting your credit score.

 

Not having a credit history

This may sound really astounding or a backdoor entrant but this is in fact true. Not having a credit history has a negative impact on your credit score. Several factors determine your credit score, which helps in building up a credit history, therefore, credit score. Factors considered are- loan repayment history, credit behavior, credit utilization limit etc. If you don’t have a credit history, you’re making it arduous for the lender or any financial institution to determine your creditworthiness. It’s a simple analogy, no credit history means no credit score.

 

Maxed out credit cards

Maxing out your card means that you’ve already exhausted your credit limit or are adjacent to it. For instance, if your credit limit is ₹100,000 and credit balance is ₹100,000. Then you have maxed out your credit card. Maxing out your credit card makes your credit utilization rate at 100%, which again affects your credit score.

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Types of credit on your report

There are two rudimentary types of credit-accounts that you should know about, revolving and installment accounts. Having both types of accounts in your credit report can be helpful in maintaining a good credit score. Credit-mix holds roughly 10% of the total credit score. Though it’s not the most popular notion, still maintaining a good credit mix will only help in improving credit score over time.

 

New credit

New credit shares almost 10% in your credit score. Avoid opening too many credit accounts. Opening multiple accounts in a short period of time can affect your credit score. Opening new account lowers the average credit rate of a credit account, which means a lower credit score.

 

Your credit score is one of the most important factors in getting an approval for a loan and also providing you with benefits like low-interest rates. It’s up to you to handle your credit report wisely and constantly look for any inaccuracies and mishappenings in your report. And maintain a good credit score.

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