A credit score is a three-digit figure used by banks to determine whether or not an applicant is qualified for a loan or credit card. The credit bureaus use the credit history provided in your credit report to compute your credit ratings. Each credit agency uses a different credit scoring model to calculate your credit score. Although your credit score may differ, the elements that each bureau considers are the same, and they are as follows:

a) Payment History: 35%

b) Credit Utilization: 30%

c) Credit History Length: 15%

d) Credit Mix: 10%

e) New Credit: 10%

Let’s look at all these factors in detail with the level of impact they have on your credit history and score.

1. Payment History- 35%

One of the most crucial elements that affects your credit score is your payment history. If you pay your credit card bills and loan EMIs on time, it demonstrates that you are a responsible borrower who is less likely to fail. Responsible credit behaviour will also qualify you for lower loan and credit rates. Payments that are late or skipped will lower your score by many points.

2. Credit Utilization Ratio- 30%

Credit utilisation is the second most important element that influences your credit score. The total amount of credit you've utilised in relation to the total credit limit available to you is referred to as a credit utilisation ratio. Divide your total outstanding balance by your total credit limit to get your credit utilisation ratio. To keep a high credit score, you should only spend 30% of your credit limit.

3. Credit History Length- 15%

When calculating your credit score to determine your creditworthiness, the average length of your credit history is also taken into account. Your credit score will improve if you have handled your credit properly in the past and continue to make on-time payments on your present loan and credit card accounts. A long credit history aids lenders in making an informed choice about whether or not to extend credit to you. As a result, it's a good idea to keep any accounts that you've had for a long time open.

4. Credit Mix- 10%

It is critical to maintain a healthy balance of secured and unsecured loans. Having a diverse credit portfolio can help you improve your credit score. Although it has a smaller impact on your score than the other categories, it should not be overlooked. Your credit mix reflects your previous experience with both types of credit. Your credit inquiries (hard inquiries), in addition to the types of accounts, are taken into account when determining your score. A prospective creditor with whom you have applied for credit makes a hard investigation. A single credit inquiry will have a minor impact on your scores, but a large number of credit queries will have a significant impact on your credit health.

5. New Credit-10%

The number of new credit accounts you've started recently is also taken into account when calculating your credit score. The duration of your credit history may be affected by new accounts. A high number of accounts or queries implies a higher level of risk, which can lower your credit score. As a result, you should avoid applying for many credit products at the same time to protect your credit score. Maintaining these criteria is critical since they have a direct impact on your credit score, which in turn influences your capacity to obtain loans or credit cards from lenders.


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