Your credit score plays an important role in your loan application process. Having a good credit score ensures a high loan amount and favorable interest rates. You have to check your credit score regularly and ensure that you take all necessary steps to maintain it at a good number. 

In order to achieve a high credit score, you first need to know the top factors that affect your credit score. We have made a list of ‘Top 5 factors that have an impact on your credit score’ to help you. 

1. Payment History

Lenders want to know if you are a responsible borrower. They want to be assured that you will repay your loan on time. Your credit report will tell them about your payment history. And naturally, it has an impact on your credit score. Your payment history includes all your debts and your repayments towards them. It also lists late payments and any defaults. This bears a significant impact on your credit score. 

If you want to achieve a decent credit score, you simply have to make all your loan EMIs and repayments on time. You can use ECS, auto-debit or NACH mandate features to ensure that the EMI is debited on time. Make sure that you always maintain a sufficient balance in your account towards the EMI amount. 

2. Credit Utilization Ratio

Your Credit Utilization Rate, also known as your Credit Utilization Ratio, is the amount of revolving credit you’re actually using out of the total amount of revolving credit you have available. To put it another way, it’s the sum of your current debt minus your credit limit. The most frequent way to express it is as a percentage.

The second most important factor affecting your credit score is your Credit Utilization Ratio. It appears just after payment history in the ‘impact’ list. This ratio helps lenders determine how responsible you are with your debt. Experts suggest that a credit utilization ratio below 30% is good to achieve an excellent credit score.

While having a low credit utilization ratio is good, not using your credit at all will not bode well with lenders. You need to demonstrate that you’re in control of your credit card, by using it responsibly. 

3. Length of your Credit History

While your payment history and credit utilization are important, the next important point is how long you have had access to credit. If you are a very young person, you may not have a long and detailed credit history. This is not helpful for lenders to determine your creditworthiness. They expect a considerable period of time on your credit history to help them assess you. Longer your credit history, better your credit scores. A shorter credit history is good too, as long as there are no bad remarks due to late payments or payment defaults. 

One trick to achieve a good credit history is by leaving credit cards open and using them occasionally to keep them active. This way, you are creating a trustworthy record to account for your credit score. 

4. Credit Mix

Now, there are secured loans and unsecured loans. Home loans, vehicle loans and gold loans are some secured loans; while credit cards, personal loans or instant loans are unsecured loans. Lenders want to see a healthy mix of all these loan types on your credit report. Handling a mix of different loan types contributes to a high credit score. Individuals with high credit scores generally have a diverse credit portfolio, which may include a vehicle loan, credit card, student loan, home loan, and other credit products. Credit scoring models look at the different sorts of accounts you have and how many of each you have to determine how well you handle a variety of credit products.

5. New Credit

Credit score depends on how many new credits you have taken up recently. It also looks at the frequency at which you apply for new credits. This accounts to about 10% of your credit score. 

Lenders often conduct a hard inquiry when you ask for a new line of credit, which is the process of checking your credit information before processing your loan. A soft inquiry, on the other hand, is when you review your own credit information.

Your credit score may suffer a minor and temporary drop as a result of a hard inquiry. This is because the bureau believes that if you’ve opened a lot of accounts recently and the percentage of them is high compared to the total number of accounts, you’re at higher credit risk. People do this when they are having cash flow issues or are intending to take on a lot of additional debt.

Additional Reading: The Big 5: Top Factors that Affect your Credit Score

Conclusion: Your credit score is basically an indication of how good a borrower you are. This is important for lenders to gauge your risk factor. Most lenders add a component called ‘Risk Premium’ to your base interest rate. This is dependent on your credit score and how much risk the lender perceives you as. So it is important to achieve and maintain a high credit score if you want to get the best terms and offers for your loans.