Let us now look at the factors that influence your credit score.
The methodology used by credit bureaus to calculate credit scores is not available in the public domain.
However, the following are the broad factors and their weightage as gleaned from RBI instructions and Credit Bureau disclosures:
- Payment Discipline: Impact: High. The repayment pattern over the previous 36 months is the most crucial factor. It has a significant impact on one’s credit score. The greater the percentage of on-time payments and the lesser the percentage of delayed payments or defaults, the higher the credit score.
- Credit Utilisation Ratio: Impact: High. This factor is particularly applicable for credit cards. It calculates the ratio of your credit card’s utilised limit to the total limit. The lower the ratio, the higher the credit score. Therefore, you should keep the credit utilisation ratio on each credit card to no more than 25% of the available limit.
- Length of Credit History: Impact: Medium. The longer your credit history, the higher your credit score. To maintain the length of your credit history, try to keep your oldest credit card active.
- Recent loan accounts/ loan enquiries: Impact: Low. A sudden increase in debt or multiple loan/credit card inquiries in a brief period hurts the credit score. This factor has a minor and temporary impact.
- Credit Mix: Impact: Low. The ratio of unsecured loans (credit cards & personal loans) in your total debt. The higher the percentage, the lower the credit score.
Bottom line: To maintain/improve your credit score, do the following:
- Ensure on-time payments,
- Maintain a credit utilisation rate of less than 25%,
- Keep old credit cards active,
- Do not apply for new loans/credit cards frequently, and
- Keep the proportion of unsecured loans to a bare minimum.