Factors that Affect your Credit Score
A credit score is the first thing that is checked and evaluated when applying for a credit card or a loan. The lending authority will firstly check the credibility of an individual before the disbursal of the loan. A lot of factors are evaluated for generating a credit score. If a good credit score is maintained, a lower interest rate can be availed while applying for the loan. Also, the reward points and other benefits get enabled when the credit score is up to the mark.
The credit rating agencies provide various credit scores and the lender may use any of them. Consumer credit scores are the ones that are important and play a vital role in the loan application process.
The application of loans to the repayment of these loans has an impact on the credit score of an individual. The individual may repay the loans on time but may have applied for several loans in a very short period which leads to degradation of the credit score. Thus while availing of a loan one should be confident of the repayment schedule for the same.
Factors Affecting Credit Score
The repayment history is one of the major reasons affecting the credit score of any individual. The loans that are already taken and the repayment for which is in the process is the best indicator for any lending agency to judge and for the credit bureau to give a score for the same. Individuals’ financial planning and discipline can be seen in the timely repayment of their dues. Thus repayment history has to be clean and timely for a good credit score.
The credit age is calculated from the date of your first loan sanctioned to date. This indicates how many years have been passed since the loan was availed and the repayment history for the same. The greater the credit age the more the chances of getting a loan and the lesser the credit age, the loan will be sanctioned with all the procedures and checks done before the approval process. A person with a credit age of three years or more is preferred instead of someone new in the credit market.
The term credit utilization refers to using the available credit for purposes that can be diverse. The more credit utilized, the lower the credit score. The credit score should be no more than 30%. The quantum of credit utilized by the individual shows that the needs and wants of the individual are not separate and the individual is credit hungry. For this reason, credit utilization should be minimum for an individual. However, credit utilization does not hamper the credit score of an individual directly. The indirect effect is shown on the credit report of the individual
Queries on Credit
When an individual applies for credit, the lender will try to collect and analyze all the information that is available with the credit bureaus. The application of credit and extraction of this information by the lender is called a hard inquiry or pull inquiry. If too many inquiries have been made, then the credit score is impacted as the individual is seen as someone who is in urgent need of any credit which can be given. A soft query on the other hand is when the individual is self-assessing their credit score online and gathering information based on which a loan application can be made. Soft queries do not affect the credit score of an individual.
A credit mix is known as the combination of loans that are borrowed by an individual. The individuals can have multiple loans that they have availed for different purposes and at different times. A good credit mix is where at least one secured loan is availed with a long debt period. The more the exposure to secured loans, the greater the credit score will be and the more the exposure to unsecured loans, the lesser the credit score will be. The increased exposure to unsecured loans will always be a disadvantage for an individual.
Continuous Opening of New Accounts
If new accounts are opened frequently, the individual will be under the scanner as it shows that the available accounts are not enough for fulfilling the credit requirements. As all this information is recorded by the credit bureaus, it will be a disadvantage for the individual.
Error-free Credit Report
The credit report should be error-free as it contains information about the earlier loans and also personal information like the name and address and other details of an individual. The credit report should be ideally checked by the individual at least every quarter to rule out any discrepancy in the report. If any discrepancies arise, then the individual should file a dispute with the credit bureaus.
No Credit History
If any individual does not have any credit history, then it may hurt the credit report. As the report is based on the past credit history of an individual the lender is not able to segregate the individual into high risk or low-risk categories. The lender will look into other factors like income, employment and securities for the loan.
Examine Credit Report Before Application
The credit score determines credit risk and if it is low, a higher rate of interest can be charged. So, a credit report should be generated at least one month before applying for the loan. Any changes to be made in the credit report can be done in the time availed in between the credit report generation and loan application.
Not Changing Credit Limit Frequently
Changing credit limits frequently hurt the credit report of an individual. The lender calculates the net worth of an individual before sanctioning the loan or granting a credit card. If the limit is changed frequently, then the lender will have the image that the individual is dependent on debt excessively and it is seen as a red flag in the industry.
The above factors need to be kept in mind while applying for a credit card or a loan. These will affect the credit score and it depends upon the individual whether the impact should be positive or negative. If all the above are kept in mind, then the credit score will not be affected.
Meta Description: What affects the Credit Score? How to Improve your Credit Score? The credit history, credit age, utilization of credit, queries on credit, credit mix, error-free report, and not changing the credit limit frequently are some factors which are affecting the credit report. Examine them in detail below