Faircent Bureau

While in the previous article, the bare basics of credit score were explained. This installment will further decode your credit score to explain various factors that impact it. Corporate demand for loans has shrunk recently and financial institutions are now focusing more on consumer and personal loan segments. Hence, a good credit score goes a long way to improve the chances of securing a loan at a cheaper rate of interest.
To hold a good credit score, individuals need to maintain a thorough credit history which shows up in the repayment track. Depending on your diligence and discipline in repayment, the credit score improves and grades better against those who do not repay timely. Faircent encourages all its borrowers to repay the loans on time and prevent repayment delays as it has negative impact on their financial scorecard.
Now, it is essential to understand how the various factors contribute to credit score and what you need to do to keep it as high as possible.

1. 1. The repayment history (35%):
   This is the first and most crucial component that accounts for 35% impact on the credit score. All loans have to be repaid. All bills have to be paid and that too within the stipulated time period without delay to have an impeccable repayment track record. Every single default has a strong negative impact on your score.

2. 2. The amount you owe to lenders (30%):
   The credit utilization has two important factors that determine your ability to secure a loan. Number one is the total credit card amount sanctioned to you and what percentage of it is being utilized. The credit utilization ratio is the balance of outstanding on all credit cards as a percentage of aggregated credit limit on all your credit cards. The loan application becomes riskier as this ratio goes upwards.

3. 3. Number of years of servicing debt (15%)
   There is an old saying: A person with on credit history is riskier than person with not-so-good credit history. It might surprise many but the amount of time a person has been servicing debt also contributes to the credit score. This is a very good long term indictor of handling credit responsibly. Hence, the number of years of credit history in conjunction with timely repayments has a positive impact on the credit score.

4. 4. Number and amount of recent loans taken or applied for (10%):
   Every new application for a loan or a credit card etc. leads to financial institutions running a credit check to assess the financial health and repayment behavior. Too many inquires or availing loans in quick succession display a credit hungry behavior and negatively impact the credit score.

5. 5. The Credit Mix (10%):
   This is generation fuelled by EMIs even though we have traditionally been a credit averse society. Avoiding credit like a plague or using only one type of credit line is never a good decision when it comes to positive impact on the credit score. For a positive contribution from this parameter it is helpful to have a balanced mix of secured or unsecured credit lines such as consumer loan, vehicle loan, personal loan, credit card etc. including servicing them timely.

Now that the components of a credit score have been decoded, it would be helpful in assessing ways to improve it further. Explore areas where you are lagging and use this information to positively impact your credit score. A good credit score contributes a long way to get the loan at the cheapest possible interest rate.