If you know the basics of the modern-day borrowing system, you must know the importance of a credit score. Whenever you apply for a loan, the lender always checks your credit score to make sure you are creditworthy. Credit reporting agencies, namely Experian, TransUnion, and Equifax, measure your creditworthiness. These agencies provide credit data to the lenders, and lenders, along with their credit scoring system, approve or reject a loan application.
Credit score depends on five factors which are payment history, indebtedness, credit length, credit inquiries, and credit type. Each aspect has a different impact from high to low depending on the particular situation of the borrower.
Now, the question is, how do these factors affect your credit score?
- Payment history has a high impact of 35%, which means missing out on your loans EMIs and credit card payments negatively influences creditworthiness.
- Indebtedness is the condition of owing money to lenders. It has an impact of 30%—the lower the amount you owe, the lower the negative impact on your credit score. Indebtedness also includes the revolving debt you owe to your lenders. Many people rely on balance transfer and pay credit card bills with another credit card which keeps them in revolving debt, and they end up in a debt trap.
- Credit length is another important factor with a medium impact rate of 15%. The longer your credit length is, the better your credit score would be.
- Credit inquiries have a low impact of 10% on your credit score. Many people tend to neglect it, but having too many credit inquiries in a short period can negatively impact your score.
- Lastly, credit type also has a low impact of about 10%. A healthy balance of secured and unsecured loans affects your score positively.
Now that you understand which factors affect your credit score, the next important thing is to know what can improve your credit score if it is already low. A low credit score is bad news. If you urgently need a low credit score, it reduces your chances of getting loan approval. Improving your credit score is not a short-term process; it takes time, at least six months to a year. However, no credit score is beyond repair. So, how can you improve it?
Having monthly EMI and billing obligations can often put too much stress on people, and they end up missing their payments. Make sure you pay your bills and EMIs on time. Falling behind on payments is usually the beginning of a debt trap, and it becomes atrocious to get out of it.
Check your credit report
To err is human! Even credit agencies can make mistakes; they can be at either agency’s or the lender’s end in your credit report. There can be errors in reporting timely payments, inquiries, and more. You can directly raise a dispute if you find errors.
Yes, there are good debts, and then there are bad debts too. Having balanced debt refers to having a mixture of secured and unsecured debts. Too many unsecured debts harm your credit score more. Unsecured debt means taking money from a lender on high interest without keeping collateral. On one side, where timely payments on your dues can improve your score, non-payments can adversely affect it.
Credit utilization ratio
Having a credit card does not mean that you can max it out every month. Credit utilization should be less than 30% of your total limit. If you exceed the 30% mark, it affects your credit score negatively.
Keep your credit cards clear
Credit cards have increased overspending and impulse buying. Make sure that you do not spend out of your means. You might impulsively buy things at the moment, but you would end up paying more than you should have in interest. Paying the minimum due on your credit card might keep you out of late payment, but it increases the interest rate every month. Make sure you pay your credit card bills in full every month.
Avoid withdrawing money from credit cards
It might sound typical, but withdrawing money from your credit card is a sure shot way to landing into a debt trap. Each time you withdraw using your credit card, you pay an extra fee along with an added interest rate. You must avoid it.
Avoid applying for too many loans
There is a thin line between asking for a loan and being credit hungry. Applying for too many loans at the same time negatively impacts your credit score. It is vital that you wait for a considerable amount of time before applying for the following loan after one rejection.
If you are already in the debt trap and it is becoming difficult to get out of it, let us help you! Reach out to our trained debt counselors at 01246663666 or drop your details on our website to discuss your options if you are looking to settle your debts.