You must have surely heard the term ‘credit score’ if you tried applying for a loan. So, what is it? Well, credit score is a three-digit number between 300 and 900 which describes the merit of your credit. It is a representation of your creditworthiness as a numeric figure.
Credit scores are calculated by four credit bureaus in the country – TransUnion CIBIL, High Mark Credit Information, Equifax, and Experian Credit Information Company. Most of the lenders consider your CIBIL score in India when you apply for a loan. They consider a score of 750 and above as an ideal score.
In this article, we will learn how to calculate credit score and factors that affect the score.
How is Credit Score Calculated?
Each credit bureau has its own algorithm to calculate your credit score. They take several factors into consideration to compute your credit score. Understanding how those factors affect your score will help you boost credit score.
The factors include:
- Credit History
Your credit history has the highest weightage of 30% in your credit score calculation. Paying your bills on time is one of the best ways to build up your credit score. The banks and other financial institutes send all your personal and credit-related information to the credit bureaus.
The bureaus then collate all the information into your credit report and calculate your credit score.
If you pay all your outstanding bills that are associated with loan EMIs or credit cards on time, it will boost the score. Even if you miss one payment or pay it beyond the due date, it will affect the credit score.
- Credit utilization
This is the second biggest factor that affects your credit score. Credit utilization is the ratio of the total amount of credit you used to the total credit limit that is available to you. This ratio is calculated by dividing your overall outstanding balance to your total credit limit.
If you increase the credit utilization over time, it will be seen negatively by the credit bureaus. Ideally, you should use only 30 – 40% of the credit limit if you want to maintain a high credit score.
Credit utilization accounts for 25% of your credit score calculation.
- Age of the Credit
This has a medium impact on your credit score. To assess your creditworthiness better, the bureaus will consider your history with credit. You can raise credit score with a long history of credit with timely payments. It will help the lenders decide whether to offer you credit or not.
Experts advise you to keep credit cards with a long history as compared to the ones that you recently got. This factor accounts for 15% of your credit score calculation.
- Types of accounts
There has to be diversity in your credit mix. It is better to have a mix of accounts rather than having several accounts of the same type.
For instance, don’t just have several credit cards. It would be better to have a mix of a personal loan, home loan, and a credit card.
This factor accounts for 10% of the score calculation.
- Application history
It refers to the number of times you applied for different forms of credit in the past two years. If you apply for a loan too many times and the applications get rejected multiple times, it will hurt your credit score.
It accounts for 10% of your score calculation.
Now that you know how to boost your credit score, you can take the right measures to improve and maintain a high credit score. Check your credit history periodically to see if you need to work on improving your score.
Smriti Jain is the owner and senior content publisher at Financesmarti. Financesmarti is a website where she shares a lot of useful stuff for the people and business of India. This includes small business ideas and other banking information, as well. Smriti completed her education in science & technology from Delhi University. Smriti usually has interests in digital marketing now, and she has chosen this career for the full-time opportunity. The primary purpose of starting this blog to provide quality information on the banking industry to the people.