5 factors that have an impact on your credit score
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5 factors that have an impact on your credit score

  • Highlights

  • Your repayment history impacts your credit score

  • Multiple loans at the same time can lower credit score

  • Multiple credit enquiries may also lower your score

  • Try to keep your credit utilisation ratio below 30%

Your credit score is one of the most important parameters in your personal loan approval. Some simple practice can improve or even lower your credit score. Understand what are the factors that can affect your credit score.

The approval of your request for credit, such as a loan application, depends on several factors. Your credit scoreis one such vital factor. This number indicates your creditworthiness based your credit history and past 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 yourcredit score. For example, it increases once you successfully clear an existing loan, or 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 it, take a look at the 5 important factors that impact your credit score.

Poor loan repayment history

This summarises your entire borrowing and repayment history. The higher the number of defaults or late payments, the more likely it is that youwill have a poor credit score. This is because unpaid debts signify that you can’t manage the credit that you have taken on, and so, it lowers your creditworthiness.

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 scoreuntil you manage to repay them successfully. Hence, it is important to ensure that you don’t borrow multiple loans at the same time.

Things to know about CIBIL Score

Several loan enquiries

Making loan enquiries can also reduce your credit score. This is the reason why you shouldn’t make an enquiry about a loan until and unless you are certain that you qualify for it. Apart from this, you should only make one or two enquiries. The more enquiries you make, the more your credit scorewill 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 scorenegatively. But, if you only take one type of credit, it doesn’t necessarily give your credit scorea boost. When you take various types of credit, including secure and unsecure loans, for example, and are able to repay them on time, it shows that you are capable of handling all kinds of credit. In turn, this affects your credit scorepositively.

Credit utilisation ratio

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 scoredrops. 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 yourcredit 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 your CIBIL score is maintained.

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