7 secret factors that affect your credit score in India – What lenders don’t tell you | Mint

Knowing the factors influencing credit score while availing of loans and credit cards in India is vital. Though everyone is aware of most of the key drivers, there are some hidden factors that influence credit scores that the borrowers themselves are not aware of. These important factors impact credit scores and are rarely highlighted by lenders.

The credit score concept is simple to explain, the greater the credit score, the greater the possibility of accessing the loan on lesser interest, and a low score may cause high interest or refusal of loan. Below are 7 key factors affecting your credit score that lenders hide:

1. Payment history: The single most important indicator

Your payment history contributes to your credit score by about 35%, the highest. Missed or delayed payments severely lower your score. One late payment of 30 days can lower your score by as much as 100 points. Similarly, skipping one EMI can be extremely harmful to your credit score. It is, thus, very essential to activate auto-debit for payment and have a regular payment history to avoid penalties and guard your score.

2. Credit utilisation ratio: A fundamental risk

Credit utilisation ratio is the ratio of credit that you are using to that of the credit limit. Never allow it to go past 30%. Banks will consider you as financially vulnerable and weak if you max out all your credit cards to their limits frequently or maintain high debt balances. If your card credit limit is ₹1,00,000, then keep the expenditure at or lower than ₹30,000 to have good credit scores.

3. Hard inquiries: The multiple application effect

Each time you take out credit or a credit card, there is a hard inquiry on your record. Multiple inquiries over a short period of time can indicate financial difficulty and decrease your score. It is a risk indicator for lenders because it indicates that you are possibly struggling to pay off current debt obligations. For example, if you are comparing three loans and shopping around in a month, your score might even decrease by 10–20 points per inquiry.

4. Errors on your credit report: The silent score killer

Errors on your credit report, such as incorrect personal information, duplicate loan records, or delayed payments, can decrease your score decisively. Your credit report must be reviewed from time to time to detect and rectify any doubts. Discrepancies must be rectified by lenders themselves, as the credit bureau will not automatically rectify them. The Reserve Bank of India (RBI) has now instructed credit bureaus to revise credit scores every 15 days, making it more transparent, helpful and accurate.

5. Credit history age: Older accounts count

Your credit history does count. The older the credit history, the more credit-experienced you are, lenders presume. Closing old credit card or loan accounts would decrease your credit history and score.

Thus, it’s better to keep old accounts open even if you no longer use them. This helps in providing you with a solid repayment track record.

6. Type of credit: A variety of types is ideal

Having over one type of credit i.e., home loans, credit cards, and personal loans, will definitely enhance your score. Even better for the lenders is to have borrowers with different types of credits and can handle them efficiently. For example: Paying a home loan and paying a credit card in addition to the home loan indicates good financial health and enhances your score.

7. Credit card utilisation and limit reporting

Although you pay the credit card on time every month, your credit utilisation ratio could show up to be high if the amount is reported before the due date of payment. If you spend ₹50,000 on a ₹1,00,000 limit card and pay before the payment due date, the reported utilisation can stick at 50% if the statement has already been completed earlier than the payment. Paying one or two days before the statement date can boost your degree of reported utilisation. Therefore, at all costs, credit utilisation should be kept below 30%.

Conclusion: Power yourself with information

Keeping yourself informed of all such important factors will give you the power to shape your credit score. With proper information regarding such factors, you will be able to maximise your score and boost your profile, and will most probably be offered good terms for your future loans. A good credit score does not only give you access to good finance but economic security and freedom as well.