Credit score is a number that reveals the credit worthiness of borrowers. The lenders take into consideration the borrowers before lending money to them. Hence, higher the credit score higher will be the possibility of getting a loan and vice-versa. The model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions. Thus, it is a number between 300–850 It depends on the factors like-
1. Payment History – High Impact:
Payment history is one of the most important factors that affects your score. If you have been consistent in paying your bills/loan EMIs, it suggests that you are a responsible borrower and are at a lower risk of defaulting. A responsible credit behaviour will also make you eligible for preferential rates on loans and quicker approval on your applications. Making late payments, missing payments, etc. Will lower your score by several points.
- Credit Utilisation Ratio – High Impact:
Credit usage is the second biggest factor that affects your credit score. A credit utilisation ratio refers to the total amount of credit you have used in proportion to the cumulative total credit limit available to you. Credit utilisation ratio is calculated by diving your overall outstanding balance by your total credit limit. According to experts, consumers should ideally use only 30-40% of the credit limit to maintain a high score.
3.Age of the Credit – Medium Impact:
To better assess your creditworthiness, your history with credit is also considered when computing your score. If you have handled your credit in a responsible manner in the past and continue to service payments on time on your active credit lines, it will positively affect your credit score. A long credit history helps lenders take a sound decision on whether to offer you credit or not. Therefore, it is advised to keep credit cards with a long history open compared to cards you have recently acquired.
4. Total Accounts – Low Impact:
It is important to maintain a good balance of secured as well as unsecured credit. A credit card is an example of unsecured credit while a secured credit can be a car loan or home loan. A mix credit helps to boost your score. Although, it has a lower impact compared to other factors, you should not ignore it. Your total accounts reflect the experience you have with handling both types of credit. You should avoid borrowing only one type of credit in large quantities as it could hamper your score.
The ideal range
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
How to improve credit score
1.Firstly, pay the outstanding instalments of loan or credit on time.
2. Secondly, if you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit.
3. Thirdly, if you don’t have the time to improve your credit score, credit repair companies will negotiate with your creditors and the three credit agencies on your behalf, in exchange for a monthly fee.
4. Finally, the credit card holder must use the same frequently and repay the credit amount. It will increase the credit limit of card holders.