- What are the different repayment aspects that contribute to your credit score?
- Know the weightage of each of these aspects contributing to your credit score.
There is an often-repeated financial term that you must have heard innumerable time from the people around you. This term is the Credit Score. Observe around yourself and you will notice people saying things like – “My Credit Score is pretty low”, “Why is my credit score going so low in such a short period of time?”, “How can I increase my Credit Score?”, etc. The main reason why people have so many questions about it is they don’t really understand the credit score and aspects that carry some weightage to their credit score.
If we were to put it simply, your Credit Score is a three-digit number ranging from 300 to 900 which shows your creditworthiness and overall financial behavior. It is derived from your credit report. Let’s understand this via an example. Consider your Credit Report as your Scorecard you used to get in your school and your Rank as the Credit Score. However, this is your financial report card consisting of all your financial transactions such as all your Debt, Repayments, utility bills, etc. To understand credit score better , you must know the aspects that carry a different weightage to your credit score.
So, in this article, we will be explaining to you each of the aspects of your credit score so that you don’t have any doubt left in your mind. Keep reading to know more about it!
What are the Different Repayment Aspects That Contribute to Your Credit Score?
As we told above that your credit score does not derive from a single thing; it is made up after taking several aspects into consideration. These aspects are Your Repayment History, Total amount owed by Borrowers, Number of years servicing the Debt, Number & amount of recent loans availed or applied for and Credit Mix. All these aspects have different weightage in your credit score and contribute towards building your credit score accordingly.
If you are wondering who maintains the record of all your financial transactions then we want to tell you that there are several credit bureaus approved by the RBI to do this. Some of the leading credit bureaus are CIBIL, Equifax, Experian and CRIF Highmark. These bureaus keep track of all your aspects and then assign a credit score to you. So, knowing the different aspects is pretty important.
In the below table, we are showing you all the aspects and their individual weightage to your credit score. Check it out!
|Repayment Aspects||Weightage to Your Credit Score|
|Your Repayment History||35%|
|The Total Amount Owed by the Borrower||30%|
|Number of Years Servicing the Debt||15%|
|Number & Amount of Recent Loans Availed or Applied for||10%|
Now, we will explain each of these aspects so that you can understand them better.
Your Repayment History
As you can clearly see in the table, Your Repayment History carries the maximum weightage to your credit score which is 35% of the overall credit score weightage. Your repayment history is the percentage of your loan and credit card payments made on time for the last 36 months. Let’s understand this through an example. Suppose you buy something with your credit card worth INR 2,000. There will be a due date for you to pay this amount later. This will be your credit card bill for a month considering you don’t use your credit card on any other spendings. So, in order to make your payment history excellent, you will need to pay this amount on or before the due date.
When you always pay your credit card bills and Loan EMIs on time, your repayment history will have a positive impact because of this. And it will help you in building a good credit score (considered to be 700 or above) gradually. Paying all your dues on time is a habit that you will need to develop and maintain over time, and once you will start doing it, you will see how it has a high impact on your overall credit score. Your credit score will always be high if you make your repayments on or before due dates. Even one missed payment can affect your score negatively. Your credit report has all the details related to the payments you made on time and the ones you made after the due date.
Higher will be the percentage of on-time payments, higher will be its impact on your credit score. So, it’s important to always repay your dues on time. And the high weightage of the Repayment History will contribute to your credit score accordingly.
The Total Amount Owed by Borrower
After the Repayment History, the total amount owed by the borrower (level of debt) and your credit utilization ratio also plays a crucial role in contributing towards your overall credit score. As you can see that the weightage of this aspect is considered to be 30% of the overall weightage, so you can gauge the importance of this aspect. Let’s understand what is this aspect all about?
There are several types of loans that an individual takes according to his/her financial needs, such as Personal Loans, Home Loans, Car Loans, etc, and pay the loan amount via EMIs. So, credit bureaus check the way by which an individual manages the total amount owed. Suppose an individual has taken a personal loan of INR 5 lakh and has paid it on time without missing any EMI. So, this will be an indication that an individual can manage the owed amount responsibility and it will have a positive impact on the credit score.
But there is something which is more important than this which is your Credit Utilization Ratio. This, usually, has a high impact on your overall credit score. You must be thinking what exactly is Credit Utilization Ratio? Well, simply put, it is the percentage of the total available limit that is used in a month. It is advised to keep your credit utilization ratio to 30% or less.
Let’s understand this with an example. Suppose your overall credit limit is INR 60,000. Then you should not spend more than INR 18,000 (30% of the total credit limit) in a month. Spending more than your ideal utilization ratio for a long period of time can impact your credit score negatively. By keeping your utilization low, you will be able to maintain a good credit score. Also, it is important to spend according to your repayment capacity so that you can pay your dues on time.
Number of years servicing the Debt
The period since you are servicing the debt is also an important aspect of your credit score and contributes to around 15% of your overall credit score. An individual who has a longer credit history will have a higher chance to have a good credit score as compared to an individual with several new loan accounts or credit cards. This aspect simply helps lenders in understanding the fact that the borrower has substantial past experience in handling the debt and he or she can handle it pretty well without any trouble if trusted with a new debt.
There are a variety of factors related to the Credit History that can contribute towards your credit score. We are mentioning some of them below. Have a look.
- The age of your oldest account
- The age of your newest account
- The average age of all your debt accounts
- Whether you have used a debt account recently
Among all the factors mentioned above, the most crucial factor is the age of your oldest account. This helps in increasing the average age of all of your debt accounts. A lot of individuals tend to close their oldest credit cards when they have more than one credit card and want to opt for a new one. This affects both credit utilization ratio and your average age of credit history. That’s why generally it is advised to not close your oldest credit card accounts.
Similarly, you should opt for new loans and credit cards only when you are in need of it. Otherwise you should not opt for it, as it reduces your average credit history, and subsequently, it can affect your credit score negatively.
That’s why it is also advised to not open several new accounts at once. The fact that whether you have opted for any kind of loan or credit card can also affect your credit score. In short, the longer will be your credit history, higher would be your credit score. So, don’t try to have several new credit cards or loans at once unnecessarily.
Number & Amount of Recent Loans Availed or Applied for
The number and amount of the recent loans you availed or applied for also plays an important role in determining your credit score. When it comes to the weightage, it contributes 10% to your overall credit score. Whenever you apply for a loan, the lender checks your credit report to see your repayment behavior and then decides whether it is good to lend you the money. This inquiry by the lender is known as the Hard Enquiry. The other type of enquiry is the Soft Enquiry when you check your credit report by yourself.
If you applied for a loan once and a lender made a single hard enquiry, it will show on your credit report. Suppose you applied for a loan multiple times in a short period of time, then too many hard inquiries on your report can hurt your score badly as it may show you as a greedy borrower in the eyes of the lender. So, you should never apply for multiple loans in a short duration.
Other than this, the amount you opted in the recent loans can also impact your credit score. If you had taken a large loan amount in the past and you repaid the loan without missing any EMIs then the lender will trust you more as compared to a situation where you were able to clear the past loan with so much trouble and multiple delays. A lot of individuals don’t know this aspect very well and by applying for multiple loans in a short period of time, they end up hurting their credit score.
Credit Mix is something which is also quite an important aspect of your credit score and contributes 10% of the overall weightage to your score. As it is evident from the name, the credit mix is to have different kinds of credits such as credit cards and loans in your overall financials. You can say that the credit mix is the diversity of your credit accounts.
By gauging the credit mix in the credit report, a lender assesses your ability to handle different kinds of credits. This is one of the factors that is overlooked by most consumers. People don’t know how important it is to have a different kind of credit in your account. But it doesn’t mean that you should go and opt for unnecessary loans. As you can see it is only a minor factor, so you should opt for a loan or a credit card only when you need it. Let’s understand this through an example. Let’s assume you currently have a credit card and a personal loan on your name and you are in urgent need of funds.
So, it would be better if you opt for a secured loan such as Gold Loan, Loan Against Securities, Loan Against property, etc, as compared to going for another unsecured loan (personal loan) as it will bring a better kind of credit mix in your overall credit profile.
The more kinds of credits you will have in your profile, the higher will be your overall credit score considering you pay all of them on or before the due date otherwise your credit score can also get a sharp downward shift.