5 factors that impact your credit score the most

Your credit score is an important financial metric that reflects your creditworthiness. Assigned by credit bureaus, this rating significantly impacts your financial life. Whether you apply for a loan, buy insurance, rent a place, or even seek a job, your credit profile can make a difference.

But have you ever wondered what contributes to the score that you see when you check your credit report? Here are five essential factors that shape your credit profile: 

1. Payment history

Your payment history is the most significant factor influencing your credit score. It is a direct measure of your creditworthiness. While borrowing money is common, your ability to repay it on time makes all the difference. Consistently making timely payments helps improve your score, whereas missed, late or defaulted payments can negatively impact it. 

To avoid delays or default, it is essential to plan your finances well. Create a budget and earmark a portion of your income specifically for debt repayments. Automating your payments and setting up reminders can also help. By improving your repayment patterns, you can rebuild and strengthen your credit score over time. 

2. Credit Utilisation Ratio (CUR) 

The next biggest contributor to your credit score is your CUR – the ratio of the total credit you use to the total credit available to you. A high CUR suggests financial vulnerability and over-reliance on credit. On the other hand, a low CUR demonstrates responsible credit management. Ideally, you must keep your CUR below 30%. For instance, if you have a credit limit of ₹1 lakh, you must aim to restrict your usage to ₹30,000. 

A good way to rationalise your credit card spending is to use it primarily for emergencies. Refraining from using it for regular expenses can help maintain a healthy CUR and increase your credit score over time. You can also check with your lender if you qualify for a higher credit limit. Increasing the limit while maintaining the same spending level can also bring down the CUR. Additionally, make sure to pay off outstanding balances regularly to keep a low CUR. 

3. Length of credit history

A longer credit history with timely repayments usually contributes to a higher score because it gives lenders insights into your long-term financial habits. It also helps establish a positive track record, demonstrating your ability to manage credit responsibly.  

Lenders usually assess credit history by considering the following: 

• The age of your oldest credit account
• The age of your newest credit account 
• The average age of all your credit accounts 

To build a strong credit history, start using credit early, but manage it cautiously so you don’t fall into the debt trap. Moreover, keep your old accounts active if they don’t come with high fees. Closing old accounts or opening multiple new accounts in a short period can negatively impact your score.

4. Credit mix 

Your credit mix – the types of credit accounts you hold – also influences your credit score to some extent. These accounts generally fall into two categories: 

• Revolving credit, such as credit cards, where you can borrow up to a limit and repay flexibly
• Instalment loans, such as personal loans, where you make fixed payments over time

Having a diverse mix of credit may work in your favour, provided you ensure timely repayments across all credit types. However, taking new credit solely to achieve a diversified credit mix is not advisable. 

5. New credit

Applying for new credit in a short span can hurt your score, as it portrays you as a high-risk borrower. More debts could mean a potentially weakened ability to manage existing obligations efficiently. 

Every time you apply for a new credit, lenders conduct a hard inquiry or hard pull on your credit report. A single hard inquiry usually has a negligible and temporary influence on your score. However, multiple inquiries in a short period can have a compounding negative effect.

Avoid applying for multiple lines of credit at once to prevent unnecessary damage to your credit score. Additionally, space out your credit applications to minimise the impact of hard inquiries.  

Conclusion 

Multiple factors impact your credit score. Understanding these factors and knowing how to increase your credit score or how to improve your credit score is key to maintaining a strong financial profile.

By managing your repayments, keeping a low CUR, maintaining a long credit history, balancing your credit mix and being mindful of new credit applications, you can enhance your credit profile and ensure a healthy financial life.