Your credit score is an important indicator of your financial health. It affects your ability to get loans, the interest rates you pay, and even your job prospects. Understanding what factors determine your credit rating can help you manage it. Some key factors that affect your credit rating are as follows.
Payment History
Your payment history is the most significant factor in your credit score. It is a record which shows whether you have paid your past credit accounts on time. Late payments, defaults, and bankruptcies can negatively impact your credit score.
Key Points:
- Pay all your bills on time, including credit cards, loans, and even utilities
- Set up automatic payments to avoid missing due dates
- If you have missed a deadline for a bill or due, try to make the payment as soon as possible. The longer a payment is overdue, the worse it affects your score.
Credit Utilisation Ratio
The credit utilisation ratio is the ratio of your current credit card balances to your credit card limits. A lower ratio is better for your credit score.
Key Points:
- Keep your credit card balances below 30% of your credit limits
- If possible, pay off your balances in full each month
- Request a credit card limit increase if your spending is high
Length of Credit History
The time for which your credit accounts have been open has an impact on your score. A longer credit history can contribute to a higher score.
Key Points:
- Keep older accounts open, even if you don't use them often
- Avoid opening too many new accounts at once, as this can shorten the average age of your credit history
Credit Mix
Credit mix alludes to the different types of credits you have in your portfolio. These include credit cards, mortgages, auto loans, etc. Having a diverse mix of credit accounts can enhance your score. Key Points:
- Don't open new accounts just to diversify. Only take on new credit if you need it.
- Focus on managing the types of credit you already have
New Credit Inquiries
Each time you apply for a new credit option, it results in a hard inquiry on your credit report. Having multiple hard inquiries in a short span of time can lower your score.
Key Points:
- Only apply for new credit when necessary
- If applying for a loan, do it within a short period to minimise the impact of inquiries
Total Debt and Credit Balances
The total amount of debt you have impacts your credit score. This includes credit cards, mortgages, auto loans, and other types of credit.
Key Points:
- Keep your debt levels as low as possible
- Make consistent payments to reduce your overall debt
- Avoid taking on new debt if you are already struggling to manage existing debt
Public Records and Collections
Negative records like bankruptcies, tax liens, and civil judgments can affect your score. Accounts in collections also harm your credit score.
Key Points:
- Work to resolve any negative public records or collections as soon as possible
- Stay aware of your financial obligations to avoid legal actions
Credit Behaviour and Management
Your credit behaviour and how you manage your accounts over time are also considered.
Key Points:
- Regularly review your credit reports to ensure accuracy
- Dispute any inaccuracies with credit bureaus
- Develop a budget to manage your finances effectively and avoid overspending
Avoiding Financial Mistakes
Small mistakes can add up and harm your credit score over time.
Key Points:
- Avoid making minimum payments on credit cards. Aim to pay more to reduce your balance faster.
- Don’t close old credit accounts. It can reduce your available credit and increase your utilisation ratio.
- Avoid co-signing loans for others. If they default, it affects your credit score.
Improving Your Credit Score
Improving your credit score takes time and effort. Here are some things you can do to enhance your score:
- Create a plan to pay down existing debt
- Use credit wisely and avoid new debt unless necessary
- Regularly monitor your credit score and reports to track your progress
Your credit score is a vital part of your financial life. By understanding the factors that affect it, you can take steps to manage and improve your score. Paying bills on time, maintaining a low credit utilisation ratio, and managing your debt responsibly are key practices. Before investing in an FD or any other financial instrument consider checking their credit ratings. This will help you assess the security of your investment.
Regularly review your credit reports and dispute any inaccuracies. This can help you build a good credit score. To get started, check your credit score on Bajaj Markets. This is the first step towards effectively managing your credit profile. With effort, maintain a strong credit score and open doors to better opportunities.
Disclaimer: No Business Standard Journalist was involved in creation of this content