Your credit score is one of the most important numbers in your financial life. It is crucial to your ability to borrow money, secure loans at favourable terms, and even influence your insurance premium. The better your credit score, the better financial opportunities you’ll have access to. In this blog, we will explore the top factors that affect credit score and give you actionable insights into how to improve and maintain a strong credit profile.
A credit score is a numerical representation of your creditworthiness; it is a summary of your credit report and is calculated based on your credit history and financial behaviour. The credit score range is between 300 to 900; the higher your score, the better it is.
A higher score opens doors to better loan offers, easy access to credit cards, and lower insurance premiums. Simply put, maintaining a healthy credit score is one of the keys to a good financial life.
Several factors influence your credit score, each carrying a different weight in the calculation.
Your payment history is the most significant factor in your score. Timely payments of EMIs and credit card bills show lenders (Banks and NBFCs) that you can be trusted to repay borrowed money. Defaulting on payments, making late payments, and settling your loan can damage your credit score.
The credit utilisation ratio is the percentage of credit you are using. It measures how much credit you use compared to your total available credit. Example: You have two credit cards, with a total limit of ₹2 lakhs, and you have used ₹120,000. Therefore, your credit utilisation ratio is 60%. A high ratio indicates you might be overdependent on credit, which can signal to lenders that you’re a riskier borrower.
When you apply for a loan or credit card, lenders (such as banks and NBFCs) request your credit report from credit bureaus. This is known as a hard credit inquiry, and each hard inquiry can lower your credit score. If you have too many hard inquiries within a short period, it can negatively impact your credit score. Credit bureaus include this information in your credit report, which stays in your report for at least six months, and many inquiries in a short time may suggest financial distress, which could lead lenders to reject your loan application.
The longer your credit history, the better. Credit history length shows how long you have managed credit products. Your credit history starts with your first credit product, which could be your first credit card, loan, buy-now-pay-later, or any other credit product. A longer credit history gives lenders more confidence in you.
Basically, there are two types of credit products available in retail credit: secured and unsecured. Loans backed by a mortgage or security are secured loans, like home loans, vehicle loans, loans against property, business loans, etc. Loans not backed by collateral or security are unsecured, like personal loans, credit cards, education loans, overdrafts, etc. A diverse mix of credit types shows your ability to responsibly manage different types of debt.
DMI Finance offers personal loans, business loans, credit cards, and loans against securities. You can apply for any of these loans to fulfil your requirements and have a good credit mix.
Credit bureaus create and update your credit report based on the data they receive from financial institutions, such as banks and NBFCs. Sometimes, wrong data shared by a financial institution or an administrative mistake by a credit bureau can put false or incorrect information in your credit report, which can negatively impact your credit score. For example, a loan that you never borrowed or an EMI default that you never missed in reality can negatively impact your credit score.
Your credit score is an important factor that can significantly impact your finances. By understanding the factors that affect your credit score, you can be cautious about mistakes that can negatively impact your credit score. To learn how to maintain or improve your score for better financial opportunities, read our blog on how to maintain a healthy credit score.
At DMI Finance, we offer personal loans and business loans to fulfil your financial requirements. To track your financial health, we provide a monthly free credit report service. It tells you how your loans and credit usage impact your score, and you can also check your free credit score on the DMI Finance app as many times as you want. Take the first step towards improving your credit profile today.
1. What are the main factors that affect my credit score?
Your credit score is determined by several factors, including payment history, credit utilisation ratio, length of credit history, types of credit used, and recent credit inquiries.
2. How does payment history impact my credit score?
Payment history is the most significant factor affecting your credit score. Timely payments of credit cards and loans make a positive impact, while late payments, defaults, or bankruptcies can lower your score.
3. Does applying for a new loan or credit card affect my credit score?
Yes, applying for a new loan or credit card results in a hard inquiry, which may temporarily lower your credit score. Multiple hard inquiries within a short period can have a deeper impact.
4. How often should I check my credit report?
You should check your credit report at least once a quarter for accuracy. Regular checks help you spot errors and ensure your score is correct. DMI Finance’s monthly free credit report service can provide valuable insights into how your loans and credit usage impact your score.
5. Does paying off debt improve my credit score immediately?
Paying off debt can improve your credit score over time, but it’s not always immediate. Reducing high credit card balances, for example, can lower your credit utilisation ratio, which may have a faster impact.
6. Can checking my own credit report lower my score?
No, checking your credit report is considered a soft inquiry, which does not affect your credit score. You are encouraged to monitor your credit report regularly to maintain your financial health.
7. How can I dispute an error on my credit report?
If you find an error or misinformation on your credit report, contact the credit bureau to raise a dispute. Provide necessary documentation to support your case. Credit bureaus are required to investigate disputes and correct any inaccuracies.
| Term | Definition |
| Creditworthiness | A lender’s assessment of how reliable you are when it comes to repaying loans. |
| Collateral | An asset used to secure a loan. If you don’t repay, the lender can sell the asset to recover its loan. |
| Credit Product | Any financial product that allows you to borrow money, such as a credit card or personal loan. |
| Default | Failure to repay a loan’s EMI or credit card bill on time. |
| Dispute (Credit Report) | A formal complaint you file with a credit bureau if you find incorrect information in your report. |
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