How is Credit Score Calculated and How Can You Improve It?

February 09, 2022

How is Credit Score Calculated and How Can You Improve It?

Your credit score is an important tool that is used to showcase your reliability in being able to repay any money that is lent to you. Read on to understand more about it and how you can work to improve your credit score.

What is a Credit Score?

A credit score refers to a number that falls between 300 and 900. It is used to indicate your creditworthiness. The higher your score, the greater your chances of being viewed as a favourable borrower to possible lenders. Your credit score is determined by your credit history which takes into account how many accounts you have, what your level of debt is and your history of repayment apart from other factors. Lenders consider your credit score in order to ascertain the potential of your being able to repay your loan within the stipulated time frame.

How is your Credit Score Calculated?

Credit bureaus are responsible for calculating your credit score. Factors that are taken into account when calculating your credit score are as follows.

Payment History – This serves as one of the most important considerations that are taken into account when considering your credit score. Should you find that you have been paying your bills and EMIs on a regular basis it showcases your responsible attitude towards borrowing and highlights that you are unlikely to default on your payments. This responsible nature is likely to be favourably viewed and give you superior rates on loans with faster approval on the same. If however you don’t make your payments in time or miss paying them your score will fall.

Credit Utilisation Ratio – An equally important consideration, this ratio takes into account the entire amount of credit you have used keeping in mind what your cumulative credit limit in its entirety amounts to. This ratio is arrived at by dividing your overall outstanding balance from your entire credit limit. Ideally, you should only use 30 to 40 percent of the credit you are entitled to in order to have a high score.

Age of the Credit - Credit history indicates your level of responsibility towards credit lines in the past and at present. Those with long credit histories entitle lenders to adequately assess profiles and determine whether credit should be offered or not.

Total Accounts – Maintaining an equal balance between secured and unsecured credit extended to you is ideal. A healthy mix of the two sources of credit help boost credit scores.

Tricks to Improve your Credit Score

In order to improve your credit score, you can consider the nifty tricks suggested below.

1. View your score report and scan for errors to rectify.

If you find that your credit score has a downward trend despite your having a good payment history, your report might have an error. This might occur in instances of a loan being cleared but still being reflected in your report. This sort of an error is capable of adversely affecting your credit score which is why it is important to scan your report for errors on a periodic basis.

2. Hold onto old credit cards.

Try to hold onto older credit cards you might have such that you can establish a longer and stronger credit history for yourself. This is provided that you are able to pay your credit card bills on time. By owning a credit card for a longer period of time and making regular payments on the same, you can boost your credit score.

3. Pay your dues in time.

It is paramount to pay your dues in the stipulated time frame to avoid tanking your credit score. Each time you default a payment it is mentioned in your report and adversely affects your score. In order to ensure you make timely payments, consider setting up standing instructions to make payments automatically.

4. Add variety to your lines of credit.

It is always best to have a mix of secured and unsecured credit in your name as relying only on unsecured loans issued in your name can adversely affect your score.

5. Avoid amassing debt

In order to avoid having a poor credit score consider taking on one loan at a time and repaying each loan prior to taking on another. Also, consider refraining from overusing your credit cards.

Conclusion:

Maintaining a good credit score can showcase to lenders your creditworthiness. Always spend within your means and don’t overextend yourself.

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