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Factors Affecting Credit Score

If you are planning to apply for a loan or a new credit card, all of a sudden you may find the word "Credit Score," bothering you at every step. The very concept of credit can be extremely confusing. You may have a vague idea of what credit score is, or may even be completely clueless about it. Whatever be the case, it is an absolute necessity that you understand what credit score is and how it can affect your finances.

What Is My Credit Score?

In layman's terms, your credit score is a number that tells how worthy you are of getting credit. Lenders use your credit score to evaluate whether you will repay your debts responsibly or not. A high credit score would make you a worthy candidate in the eyes of lenders, whereas a low credit score could easily hinder your chances of getting credit.

What Determines My Credit Score?

To keep it short and simple, your entire financial history! The number of accounts you have, your credit history, your payment history, the inquiries you make, etc. Everything you do in the financial sphere using your PAN impacts your Credit Score.

Let me tell you something amusing: to build your credit score, you must take credit, you must open a variety of accounts, and you must be active in the money market. A person with no loans or credit cards will end up with no credit score.

How is My Credit Score Measured?

Using a beam-balance.

Just kidding. It is calculated using a complicated fact-based mathematical model - an algorithm, to be precise - which evaluates your financial history and comes up with the score. You cannot possibly calculate it on your own. Why don't you try mymoneykarma's excellent Intelligence Finance Tool? It not only calculates your credit score but also guides you in managing your finances.
Are you still confused? Put yourself at ease, as we are here to provide you with the necessary  information to help you maintain a good credit score.

Factors Affecting Credit Score

There is a common misconception that your age, salary, and employment history decide how creditworthy you are. That is simply not true. These factors play just as much a role as your race, ethnicity, nationality, religion, gender, marital status, area of residence, or assets play in determining your credit score - None! The system used to calculate your credit score is efficient, and only assesses your behavior pattern concerning credit.

Factors affecting Credit Score

Let us now quickly glance through the factors that typically impact your credit score.

High-Impact Factors

  1. Payment history: Pay your bills on time. By doing so, you let lenders know that you are reliable and that you ensure timely repayment of credit. If you miss a payment, your credit score could fall significantly.

  2. Negative remarks: Your credit reports must be free of any disparaging remarks. This includes accounts in collections, bankruptcies, as well as foreclosures.

Medium-Impact Factors

  1. Age of credit history: This doesn't refer to your actual age. Rather, it shows how long you have been managing credit. You will be considered more worthy of getting credit if you can prove that you have been maintaining your credits responsibly for a longer period. To sum it up, avoid closing your oldest credit card account, as it might drastically bring down your credit score.
  2. Credit card utilization: How much should you borrow through your credit cards? Experts recommend that you shouldn't exceed 30% of your available credit limit. A low rate of credit utilization indicates that you spend responsibly. It also suggests that you are more likely to repay the loan on time. Additionally, keeping a substantial buffer on your credit limit also helps you in times of crisis or financial emergencies.

Low-Impact Factors

  1. Total accounts: This doesn't just refer to your savings accounts. It includes the number of credit cards, loans, or mortgages that you have. A variety of accounts is always preferable, as it shows that you have been trusted with credit by other lenders.

  2. Hard inquiries: A hard inquiry refers to applying for a new line of credit - be it a loan, a new credit card, a rental apartment, or a mortgage. Too many hard inquiries in a short period present you as desperate for credit. It also indicates that several other lenders have refused you the same.

Remember how I said that you need to take credit to build a good credit score? Now I say that your credit score can reduce if you make too many credit inquiries. Doesn't that sound unreasonable and counterintuitive? Well, it might seem strange, but that's how it works! 

The truth is that there's always a certain element of risk involved in going for a new credit obligation. However, once you prove that you can responsibly handle the new commitment through timely repayments over a few months, the impact of hard inquiries will surely diminish.

To Sum Up

If you understand the primary factors that govern your credit score, you can surely learn the tricks to maintain a steady credit score by improving your credit health confidently.

You might find it demanding to grasp the concept of credit score quickly, but it isn't a difficult task at all, especially with someone to help. We at mymoneykarma are continually striving to help you manage your finances. Read our posts to keep yourself updated, use our financial tool to evaluate your credit score, and let us help you with our unbiased and analytical advice. If you are willing to go the extra mile and manage your finances intelligently, we are here to extend our warm and welcoming support.

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