The approval of your request for credit, such as a loan application, depends on several factors. Your credit score is one such vital factor. This number indicates your creditworthiness based your credit history and past financial behaviour. Lenders use it as a parameter to judge how risky or credible you are as a potential borrower.
It is important to understand that a number of factors influence your credit score. For example, it increases once you successfully clear an existing loan, and decreases when you make a large number of loan enquiries. In order to ensure that you have a good credit score that will help you access funds when you need them, take a look at the 5 important factors that impact your score.
Poor loan repayment history
This summarizes your entire borrowing and repayment history. The higher the number of defaults or late payments, the more likely it is that you will have a poor credit score. This is because unpaid debts signify that you can’t manage the credit that you have taken on.
Large amount of existing debt
Your existing debt can also increase or decrease your credit score. For example, if you are currently paying the EMIs of two to three separate loans, you would have a poor credit score until you manage to repay them successfully. Hence, it is important to ensure that you don’t borrow multiple loans at the same time.
Several loan enquiries
Making multiple loan applications can also reduce your credit score. This is the reason why you shouldn’t make an enquiry about a loan unless you are certain that you qualify for it. The more enquiries or applications you make, the more your credit score will drop. Similarly, if you make loan enquiries without being sure of whether you will get approval, you may have your application rejected. This too will lower your score.
Poor mix of credit
Borrowing only one kind of credit will impact your credit score negatively. But, if you only take one type of credit, it doesn’t necessarily give your credit score a boost. When you take various types of credit, including secured and unsecured loans, for example, and are able to repay them on time, it affects your credit score positively.
Credit utilisation ratio
If you are consistently using the credit extended to you right up to the maximum limit, it shows that you are credit hungry. As a result, your credit score drops. So, it is important to keep your credit utilisation ratio to a minimum. When it’s too high, it also brings to the fore questions around your ability to repay the debt. Ideally, restrict debt utilisation to 30% of your income.
These are the various factors that affect your credit score. It is important to understand them so that you can make financial decisions cautiously, while understanding their impact on your CIBIL score. You should also check your credit score regularly to ensure that it is maintained at 685 or higher. You can check your CIBIL score for free with Bajaj Finserv.
Bajaj Finserv brings to you pre-approved offers on all of its financial products such as housing loans, business loans, personal loans, etc. Check your pre-approved offer by simply submitting some basic details.
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