Guide to building the ideal credit score

Credit ratings have an impact on many elements of your life, including whether you qualify for a loan or credit card, the interest rate you pay, and whether you can get the flat you want.

 

A higher credit score might get you access to more loan options - at cheaper interest rates. Borrowers with scores of 750 or higher usually have a variety of options, including the opportunity to qualify for 0% financing on cars and credit cards with 0% interest rates. It pays to understand how credit scores function and what the credit score ranges are.

 

What is a Credit Score?

 

A credit score is a three-digit number indicating your creditworthiness. FICO scores range between 300 and 850. The higher your score, the more likely you are to get approved for loans and at better rates.

 

A credit score is calculated using information from your credit history, such as the number of accounts, total debt, repayment history, and other criteria. Lenders use credit ratings to determine your creditworthiness, or the possibility that you will repay debts on time.

 

A credit score is a measure that assesses a person's ability to repay debts or loans based on their credit history and financial situation. This three-digit number or statistic represents an individual's eligibility and goodwill with a lender, whether a bank or a non-banking financial organization (NBFC).

 

A good credit score is between 700 and 900, indicating that the borrower has a better probability of receiving credit from lenders. To reduce the risk of repayment defaults, traditional and new-age lenders, mortgage companies, credit card companies, and so on actively check the borrower's credit score history before deciding how much credit to lend and what interest rate to charge, which varies from borrower to borrower. 

 

Also Read | Improving Your Credit Scores And Importance Of A Good Credit Score

 

Factors affecting credit score

 

In India, credit scores are calculated differently by each credit bureau. Each credit agency utilizes its own algorithm and scoring methodology to determine an individual's creditworthiness. They regularly update and improve their scoring models to maintain accuracy and relevancy. While the actual algorithms are not released, credit agencies construct credit scores based on past credit data, statistical research, and their own proprietary procedures.

 

Here's a detailed look at how several elements influence the calculation of your credit score. Each of the four credit bureaus has assigned a weightage to each component, which may fluctuate depending on their methodology and scoring algorithms.

 

1. Payment History

 

Payment history is one of the most important criteria in determining your credit score, accounting for around 35% of the computation. It takes into account the timeliness of your loan repayments, credit card payments, and any instances of default, late payment, or delinquency. Making consistent on-time payments improves your credit score.

 

2. Credit utilization

 

Credit utilization is the proportion of available credit that you are currently using. It is determined by dividing your entire outstanding credit balances by your total available credit limits. High credit utilization rates, in which a large part of credit is used, may have a negative impact on your credit score. Maintaining a low credit usage ratio is often regarded positively.

 

3. Credit Mix

 

The credit mix considers the many forms of credit accounts you have, including credit cards, loans, mortgages, and retail financing accounts. Having a wide credit mix displays your ability to manage several types of credit and can improve your credit score. When calculating your credit score, this element is thought to account for nearly 10% of the total.

 

4. New Credit Applications

 

When you apply for new credit, credit enquiries may occur, momentarily impacting your credit score. Multiple credit enquiries in a short period of time may indicate credit risk. As a result, it is best to proceed with caution when applying for many new credit accounts in a short span. New credit applications account for around 10% of your credit score.

 

Also Read | 5 Ways to Improve Credit Score

 

Tips to Improve Credit Score

 

Your credit score is determined by a variety of factors, including payment history, quantities owing, credit history duration, and more. While there is often no quick fix for a poor credit score, there are steps you can take to start increasing it right away.

 

Here are things you can do to boost your credit score.

 

1. Ensure Your Credit Reports Are Accurate

 

The three major credit reporting agencies—Experian, TransUnion, and Equifax—collect your credit information from organizations where you have open accounts. These can include banks, credit card firms, shops, auto and mortgage lenders, and even utility companies. And, while they strive to acquire correct information, they do not always succeed. An FTC research discovered that 26% of participants had a potentially substantial inaccuracy on one of their credit reports.

 

2. Understand your risk factors

 

When you request your free credit reports from AnnualCreditReport.com, you will only receive the reports. You do not view your actual credit ratings. However, for those looking to drastically improve their scores, obtaining a comprehensive credit report with scores can be advantageous.

 

3. Always pay your bill on time

 

If you could only do one thing to boost your credit score, make all of your payments on time. Each time. Your payment history accounts for 35 percent of your FICO credit score. According to Equifax, even one late payment of 30 days can result in a 90 to 110-point reduction for someone with a high credit score. The damage is much higher when the payment is more than 30 days late.

 

4. Get a credit card if you don't already have one

 

Irresponsible credit card use can harm both your credit score and your pocketbook. When used carefully, however, a credit card can be one of the quickest methods to enhance your credit, as it affects the most essential parts of your score.

 

Signing up for a credit card and paying on time every month helps you develop a good payment history. Then, by keeping your card expenditures to a minimum, you can achieve a low utilization ratio. Credit cards have a beneficial impact on both your credit mix and new account parts of your credit score.

 

5. Do all your rate shopping at once

 

Hard credit enquiries (requests for your credit report from lenders when you apply for a new loan or credit card) can have a negative influence on your credit score in the near term. However, rating agencies have become more adept at accommodating prudent consumers who wish to compare their lending options.

 

If you're looking for a mortgage, student loan, or auto loan, make a plan to shop around for rates within 30 days. You want to ensure that the inquiry conducted for one possible lender does not affect the score that the following lender may see. FICO scores omit enquiries made 30 days before scoring. 

 

Conclusion

 

Credit score is an important financial indicator that influences many elements of a person's life. Understanding the elements that influence credit scores allows individuals to take proactive efforts to enhance their creditworthiness. Maintaining a good payment history, maximizing credit utilization, and diversifying credit mix are some of the primary factors that influence credit ratings.

 

Additionally, building a lengthy credit history and strategically managing credit applications can contribute positively to creditworthiness. By recognizing and addressing these factors, individuals can enhance their financial standing, gain access to better loan terms, and open doors to improved employment opportunities. Responsible credit management and informed decision-making are key to establishing a strong credit foundation and ensuring a bright financial future.