A credit score determines the creditworthiness and helps a lender to decide qualification for a loan or a credit card. The credit history of a borrower is essential in determining the credit score.
According to CIBIL, credit score ranges from 300 to 900, and with a score of 750 points, there are chances of fasters loan approvals. But most people do not have the knowledge and guidance on How to avoid the factors that affect the credit score? so here are some of the factors and what you can do to avoid them which will help in increasing the credit score –
1. Do not miss the due dates
Missing the due date of your credit card bill, not paying equated monthly installments (EMIs) on time, harms the credit history. Even lapsing a single payment or EMI will be reflected in the report. The credit report shows the number of days for which the bill or EMI was kept unpaid after the due date.
If the credit score is low because of not paying the bills on time, be swift with the payments. Once making it a habit, it will take at least 6 to 8 months for the credit history to improve. Although, good thing is that for now, apart from loans or EMIs only credit card bills are taken into consideration while evaluating credit history and other household bills are not taken into factor.
2. Maintain a healthy credit utilization ratio
The credit utilization ratio can be defined as how much credit is benefited from the given credit limit. It is calculated in percentage terms. This ratio is calculated based on the total credit limit available on all the credit cards. Hence, it is safe to say that the lower the credit utilization ratio, the higher will be the creditworthiness. One can improve their credit utilization ratio by regularly paying credit card bills and avoiding surplus utilization of credit limits.
Another important factor that borrowers need to contemplate is the EMI-to-Income Ratio. you can calculate monthly loans and credit card repayments that you divide by the income. The rule of thumb says the maximum EMI-to-income ratio is 50%.
3. Do not increase the credit card limit frequently
While an increased limit on credit cards gives the elasticity of availing more debt, this can affect the credit scores if not used prudently. Lenders try to measure an individual’s net worth (Asset minus Liability) before sanctioning a loan. A regular increase in the credit card limit could be seen as a sign of being dependent on credit to manage expenses, something that raises a red flag for a lender.
4. Making sure all old loans are ‘closed’ and not ‘settled’
Any default on old loans is in the credit history. A default lowers the credit score and creditworthiness. If the default is on the credit report, you must immediately settle it and ensure the ‘closed’ status instead. There should also be a formal closure certificate from the lender.
Accepting a one-time or partial settlement can harm the credit score. When settling an account, it means that the bank has acknowledged accepting a payoff amount that is less than the amount originally owed. Since the lending institution is taking a loss, they show a status of “settled” in the report. This might be potentially damaging to the chances of loan approval. Accepting such offers suggest an inability to repay.
5. Keeping credit reports error-free
You must check it frequently that the credit report throughout the year to make sure that there are no errors that may affect the credit score. A credit report may contain errors such as default on payments or spelling mistakes of the name.
6. Reading credit report first before applying for a loan
A credit score determines the credit risk. So, if having a low credit score, a bank may charge a higher interest rate for the loan or even reject the loan application.
7. Not having a credit history
This may come as a surprise to many people but not having a credit history negatively impacts the credit score. You can determine the credit score on the basis of the loan repayment history, credit behavior, credit utilization limit, and other factors. If there is no credit card or no loan taken in the past, then it might make it difficult for the lender to ascertain whether the borrower will fall in the high-risk or low-risk category.
The credit score is based on financial factors that tell lenders whether you would be a good credit risk. Things that do not affect the score include:
- Your age
- Ethnicity, race, or country of origin
- Whether received public assistance (ADC, SNAP, Medicaid, etc.)
- Location
- Work history
- Family composition and responsibilities
- Participation in credit counseling
The bank or credit company may ask questions about how much a person earns, for example, to decide if a person earns enough to make minimum monthly payments on a mortgage. While they approve on certain factors, they are not tie it in any way to the actual FICO credit score.