Factors That Can Impact Your Credit Score

Your credit score can make or break your application for a loan or credit card. Here are a few important factors that can impact your credit score.

Why your credit score matters

A credit score is one of the important factors that banks take into account while accepting or rejecting your application for a loan or credit card  The higher your credit score, the better your chances are of getting approved.

The highest credit score that can be assigned is 850. Your credit score will impact your banks’ loan pricing decisions. You will get a lower rate of interest on your loan by having a good credit score. Therefore, given that a poor score can prevent you from getting a loan or a credit card, having a good score is therefore critical.

What counts the most toward a good credit score

A number of factors that can impact your credit score are taken into consideration.  These include your past payment record on loans and credit cards, the extent and type of credit card inquiries, your credit history and exposure. While the weights assigned to each of these factors do vary across credit information companies, in general, some of these factors will impact your credit score more than the others.

Your past performance — on servicing loans and making credit card payments on time — are considered the most important factors. For instance, the credit bureau assigns it the highest weight of 30 per cent. Delays in paying your loan and, worse, defaults, will reduce your credit score dramatically. Also, missing payment deadlines or defaulting on your card payments too will lower your score.

Credit exposure, the extent of which is determined by the quantum of your borrowings (loans) and your credit card utilization ratio (aggregate outstanding balance on all cards as a percentage of the aggregate of all card limits), is another critical factor. The credit bureau assigns credit exposure as 25 per cent weight in its calculations.

“High credit utilization increases your credit exposure.”  This impacts your income-to-debt ratio, one of the important criterion for assessing loan applications,” says Chandorkar. Another 25 per cent weight is assigned to the type of loans taken and the duration of credit history. The higher the percentage of unsecured loans (such as personal loans) in your portfolio and the shorter the length of your credit history, will contribute to lowering your score.

A longer credit history allows a more detailed understanding of your payment behavior. Therefore, it is important that your historical record must also be in good standing.

Other factors that can impact your credit score

The length of the credit history, credit mix and the number of credit inquiries are the other factors that are considered.  Having a diversified and well-managed borrowing portfolio comprising of credit cards and loans (secured and unsecured loans with more of the former), will have a positive impact on a person’s credit score. But, be careful, too many credit inquiries can dampen your credit score.

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