Do you know what factors affect your credit score?

Anyone who has applied for a loan/credit card knows the importance of a good credit score. The creditworthiness of a borrower is measured through the credit score. This score is denoted on a scale of 300-900 with higher numbers indicating better creditworthiness. Credit bureaus calculate your credit score based on your past and present behaviour with loans or credit cards. 

It is common knowledge that you need to pay your EMIs or credit card outstanding bills on time to have a good credit score. But is it all that you require to do to maintain a good credit score at all times? No, you may be surprised to know that there are many more factors that affect your credit score which remain unknown to many. As a result, not much attention is paid to these factors which, in turn,  can be the cause of a poor credit score. 

Through this post, we will take you through all the factors that affect your credit score. This knowledge can help you maintain a good credit score at all times. 

A good repayment record

A calendar depicting the importance of regular repayments

This is the single most important factor that helps you maintain a good credit score. When you borrow a loan you are obliged to pay back the loan with interest in the form of an EMI. Similarly, the credit card bill which is generated at the end of the billing period is an obligation.

Your lenders/credit card issuers report about your payments to the credit bureaus once in 30 days. While a one odd missed payment might not mar your credit score, repeated defaults in payments can pull your credit score quite low. 

If you fail to pay EMIs on time, it can have the biggest negative impact on your credit score. A prompt repayment, on the other hand, shows that you have been responsible with your credit which is what your future lenders will look for. If you are unable to pay your EMIs due to a medical emergency or a job loss, it is good to inform your lender well in hand. If you have been regular with your EMIs you may be given some relaxation time. 

Number of credit enquiries 

When you apply for a loan or a credit card, you authorise the lender to check your credit score and credit report from the credit bureau. When they check your credit report, an enquiry (also called as a Hard enquiry) is recorded against your PAN. 

A financially prudent individual looks to live within his/her income, barring certain instances where borrowing becomes essential. It might be to acquire assets like a home, vehicle, etc or to meet short term emergency expenses. But, if you end up borrowing to meet all your needs, big or small and do it often, you would end up with an increased number of credit enquiries. 

You should be aware that even if your loan/credit card application gets rejected an enquiry will be marked against you PAN. So it is good to limit your loan applications and keep a good gap of at least 6 months between 2 loan applications. 

Doing so will help you maintain a great credit score and bag low-interest rate on future loans. 

Existing credit accounts

Numerous credit cards representing many debts in your portfolio

The number of existing loans and credit card accounts is another feature that determines your credit score. Here, not only the number of credit accounts but the health of your credit accounts also plays a big role in the calculation of your credit score. 

If you have defaulted on your payments then your loan account/credit cards, these credit accounts are shown in red or are marked as a negative account. Having a negative account on your credit portfolio is not good. It would show that you aren’t responsible with your existing credit. 

Age of your credit accounts

Your credit score is all about you maintaining a consistent record of being responsible with credit over some time. When you have a credit account that runs over a long period, it allows the credit bureau as well as your future lenders to see how you handle your loans or credit cards. It gives insights like how prompt is your repayment, how often do you apply for credit or if you have opted to settle your loan account.

When you have a very short credit history, it makes it difficult for the credit bureaus to determine your creditworthiness. So, if you have any credit account that is running for a long time, do not try to close it off if all your other accounts are new. 

For those who are new to credit, it is good to start with a personal loan from a lender who allows loans even to those who are new to credit. When you repay promptly you would build up your credit score and be eligible for bigger loans when you need it. 

Credit portfolio

An image representing the credit portfolio mix

Credit comes in two kinds – secured and unsecured. Those loans which are availed by pledging an asset (collateral) are called secured loans and those which do not need collateral are called unsecured loans. 

If you are looking for a good credit score,  it is good to show experience in handling secured as well as unsecured credit. At the same time, a good mix of secured credit like home loans/vehicle loans with personal loans/credit cards shows that you avail credit to build assets and not just for consumption. 

So just having many personal loans may not be good enough for your credit score, especially if you have been handling credit for some time now. 

Credit card utilization

Representative image of credit card utilisation

When you get a credit card, it comes with an upper limit on spending. This limit is set based on your income, other liabilities and your credit score. However, you have to be mindful on how much of the credit limit you end up spending during each of your billing cycles.

Depending too much or maxing out your card each time shows that are a credit hungry person. So if you are a credit card user, it is recommended that you restrict your usage to 30-50% of your approved credit limit.

Errors on your Credit Report

There could be errors on your credit report which may be caused due to reasons like mix up of your name or PAN. It may also be due to the wrong reporting of your repayment or loan closure data by your lender. Each time you check your credit score, take some time to also verify that the data shown is correct. If it isn’t correct, approach your lender to get the error corrected.

So, the next time you wonder why you have a bad credit score, you know what are the reasons contributing to your score.

Akshatha Sajumon


An ex-officer of the Indian Air Force and a CFA, Akshatha loves writing on personal finance and credit products. When not working, she loves taking road trips to offbeat locations.