How Is Your Credit Score Calculated And How To Boost It?

To revive the economy, easy credit supply has been pushed for. What remains a deciding factor in providing easy loan is your credit score now. This parameter has gain even more importance amid the pandemic as individuals still continue to face financial distress because of job loss etc.

So, the primary differential in interest rate and other terms when securing loan is deciding basis the customer's risk profile as well as credit-worthiness. And to decide on that credit score is taken into consideration. And it is always in the best interest of the borrower if he or she commands a good credit score.

Credit Score: All About This Financial Metric That Comes Into Play When Borrowing Funds

In a general case, credit score is computed for borrowers that have a credit history, meaning to say that they had previously taken loan or have a credit card. And four credit bureau companies in the country compute this metric and this is precisely a 3-digit number scaling between 300 and 900.

What Credit score highlights?

Through this credit scores, the potential lender is able to assess the borrower's repayment history, loan tenure of previous borrowings, purpose for which the debt was taken.

Methodology adopted by credit bureaus for computing credit score

Each of the 4 credit bureaus including CIBIL TransUnion, Experian, Equifax or CRIF High Mark uses their independent algorithm to calculate credit scores.

Now here are the different factors based on which your credit score is computed:

1. Payment history: A record of your payment history has a high impact on your credit score. If you have been consistent in your debt repayment or paying back your credit card bills, you will be accorded a higher credit score. Also, the borrower will be given a preferential rate and application shall be processed faster.

2. Credit utilization ratio: This ratio is the percentage of the credit used as against the total credit secured. For your score to be high, the ideal credit utilization should be 30-40 percent.

3. Age of the credit- In case your credit history is old and you have made the repayments well on time then lenders will be able to better judge on extending you loan. So, this is one reason by personal experts require you to continue holding credit cards that have been held for long.

4. Mix of loan type is another factor watched out:

Now when it comes to deciding your credit score, having a mix of credit such as secured and unsecured like that of credit card will be beneficial. Though this factor has minimal impact, it should also be paid heed to.

Another important point that can boost your credit score is not having a high-ticket size single loan. Also, you should not be making multiple enquiries when trying to secure funds from financial institutions, as this impacts your score negatively.

GoodReturns.in