The idea of a credit score is something that you encounter in the space of borrowing and lending money. A credit score is a metric that a lender uses to estimate the probability of a borrower repaying a loan on time. It informs the lender of the dependability of the borrower and can range anywhere in between 300 and 900. The higher you are on the scale, the better your chances are of getting approved for a loan or a line of credit at a reasonable rate of interest. Your credit score is determined by a credit bureau, licensed by the RBI – TransUnion CIBIL, Equifax, Experian or CRIF Highmark. These are the key factors that go into the calculation of your score.

1. Payment history:

One of the most important factors affecting your credit score is your track record when it comes to your payment history. This is the most obvious sign of credibility for lenders. To assess this, credit bureaus have records pertaining to the status of payments you have made or are making towards your bills and EMIs over the course of the latest 3 years. If they find that you have been consistently making your payments on time, it suggests that you are a responsible borrower and are at a lower risk of defaulting – increasing your overall score. Similarly, overdue bills, making late or missing payments negatively affect your score. 

2. Credit utilisation ratio:

Your credit utilisation ratio (CUR) is the percentage of the total credit limit that you have, with respect to the portion of it that you spend every month. In that, it is calculated by dividing your overall outstanding balance by your total credit limit. As far as possible try to keep this number to 30% or below, as anything higher can play a significant part in reducing your credit score.

3. Age of credit lines:

Just like your payment history, your history with credit also plays a role in determining your credit score. The longer you are able to sustain your credit lines, the better your credit score. If you have been able to maintain the same credit card over a long period of time, by making timely payments and not having it cancelled, it portrays dependability and can positively impact your score. 

4. Mix of loan portfolio:

The composition of your loan portfolio – in terms of the mix of secured and unsecured loans – can also affect your credit score. Secured loans are those which are taken against collateral, like a home or auto loan; unsecured loans don’t have any security attached to them, like credit card bills or personal loans. An optimal mix of both kinds of loans can boost your score. However, when there is too much weightage on unsecured loans, this can cause your credit slow to reduce slightly, even if your payments were on time. 

5. Number of credit inquiries:

While it plays only a very small role, if the number of inquiries made about your credit score increases over a prolonged period, then your overall score may reduce by a little bit. This is because a growing number of inquiries about your credit score over time begins to signify that you may have a pattern of frequenting debt. 

Your credit score plays a significant part in determining whether you will get approved for a loan or a line of credit, and the interest rate at which it comes. It emphasises your trustworthiness as a borrower, so always try to maintain a credit score of 750 or higher as this indicates creditworthiness. On the other hand, if your score is lower than this, you should definitely work with a certified and experienced financial advisor to improve it – especially if you are planning on applying for a loan.