Boost Your Credit Score: Top Factors that Positively Impact It
Introduction
In the financial landscape, the credit score, also known as the CIBIL score, stands as a pivotal element for individuals navigating the complexities of loans and credit. This three-digit score, ranging from 300 to 850, reflects one’s financial management prowess and plays a decisive role in loan approvals. Given its significance, it becomes imperative to not only understand the origins of the credit score but also to delve into the key factors that can positively influence it.
Understanding the Origin
The Reserve Bank of India, under the ‘Credit Information Companies (Regulation) Act, 2005,’ entrusts the responsibility of providing credit scores to registered companies. Currently, four major credit bureaus—CIBIL™, Equifax, HighMark™, and Experian—operate in India. Of these, CIBIL™ holds the distinction of being the oldest and most widely used. Lenders are mandated to submit data to these bureaus, which then calculate credit scores based on various factors.
Read More: How to Read CIBIL Report – A Step by Step Process
Factors Positively Impacting the Credit Score
A credit score within the range of 600 to 850 is considered good, signifying higher creditworthiness. For those with lower scores, the focus is on improvement, while those with higher scores must strive to maintain them. The credit score is a composite of several factors, each contributing differently:
1. Payment History (35% effect)
The most influential factor, payment history reflects the individual’s track record of repaying debts. Timely payments contribute positively, while late payments, collections, foreclosures, and other negative occurrences can impact the score adversely.
2. Amounts Owed (30% effect)
This factor considers the credit utilization ratio, measuring the debt against available credit limits. Responsible usage, maintaining a lower credit utilization ratio, and using diverse credit types positively influence this aspect of the credit score.
3. Length of Credit History (15% effect)
A longer credit history is beneficial for a positive credit score. Keeping accounts open, regardless of their usage, is recommended for effective financial management. Early closure of accounts can lead to a decline in the credit score.
4. New Credit (10% effect)
The number and timing of newly opened credit accounts are crucial considerations. Opening multiple accounts within a short period can negatively impact the credit score, indicating potential financial strain.
5. Types of Credit in Use (10% effect)
The variety of credit accounts, including store accounts, mortgages, personal loans, and credit cards, influences the credit score. While less impactful than other factors, maintaining a mix of credit types can be advantageous.
Role of Each Factor in Credit Score
Payment History
The highest contributor to the credit score, payment history underscores the importance of consistent, timely payments. Instances such as accounts sent to collections, foreclosures, and late payments can significantly impact this aspect.
Amounts Owed
Credit utilization ratio plays a pivotal role here. Maintaining a balance between debt and available credit, along with responsible usage of different credit types, contributes positively to this factor.
Length of Credit History
While a longer credit history is advantageous, short-term financial efficiency can also positively influence the credit score. Balancing the duration of account open-ness is crucial for optimal credit management.
New Credit
The timing and number of newly opened credit accounts are critical. Opening multiple accounts within a short span raises red flags, indicating potential financial instability and negatively affecting the credit score.
Types of Credit in Use
The variety of credit accounts, though less impactful, should not be neglected. A balanced mix of credit types, including mortgages, personal loans, and credit cards, contributes positively to the overall credit score.
Conclusion
In the realm of long-term financial planning, credit scores play a pivotal role. Improving and maintaining a good credit score is essential for unlocking financial benefits. By focusing on key factors such as payment history, amounts owed, length of credit history, new credit, and types of credit in use, individuals can positively influence their credit scores. Regular monitoring through a CIBIL score check, facilitated by the CIBIL score app, ensures ongoing awareness and confidence in the chosen path of credit score improvement and maintenance. A strategic approach to these factors can pave the way for financial success and empowerment.