Understanding why your credit score fluctuates over time can play a crucial role in managing your finances effectively and ensuring a healthier financial future. In this article, we will delve into the key reasons behind the changes in your credit score and how you can maintain a positive credit history.
What is a credit score?
First things first, let us define what a credit score is. Your credit score is a three-digit number that represents your creditworthiness and financial reputation. In India, one of the leading credit bureaus that assess credit scores is TransUnion CIBIL. CIBIL Score ranges from 300 to 900, and a higher score of 750 or more signifies a lower credit risk. Lenders, such as banks and financial institutions, refer to your credit score to evaluate your creditworthiness before approving loans or credit cards and to determine the interest and terms they offer you.
Payment history
Your payment history carries the most weight in determining your credit score. It refers to how you have managed your debts and credit obligations in the past. Consistently making timely payments on your credit cards, loans, and other debts will have a positive impact on your credit score. Conversely, missed or delayed payments can significantly lower your score.
Credit utilisation ratio
The credit utilisation ratio is another crucial factor influencing your credit score. It represents the percentage of your available credit that you are currently using. A high credit utilisation ratio suggests that you are heavily reliant on credit, which may be perceived as a higher risk to lenders. It is generally advisable to keep your credit utilisation below 30% to maintain a healthy credit score.
Age of credit history
The age of your credit history is an often overlooked but vital aspect of your credit score. The longer your credit history, the more information lenders have to assess your creditworthiness. If you have a short credit history, try to keep your oldest accounts open to demonstrate stability and reliability.
Credit mix
A diverse credit mix can positively impact your credit score. Lenders want to see that you can responsibly handle different types of credit, such as credit cards, unsecured personal loans, secured home, or car loans. However, it is essential to manage your credit responsibly and not take on unnecessary debt to improve your credit mix.
New credit applications
Each time you apply for new credit, a hard inquiry is generated on your credit report. Multiple hard inquiries within a short period can raise concerns for lenders, as it may indicate financial distress or an intent to take on more debt. Limit your credit applications to only when necessary, and be cautious about multiple applications in a short span.
Financial hardships and negative marks
Life is unpredictable, and sometimes financial hardships may lead to negative marks on your credit report, such as late payments, defaults, or even bankruptcy. While these events can significantly impact your credit score, rebuilding your credit is possible with consistent efforts towards responsible financial management.
Monitoring and managing your credit score
Regularly monitoring your credit score is essential to catch any inaccuracies or discrepancies that might be affecting your score negatively. Keeping a close eye on your credit score allows you to address any issues promptly. Bajaj Finserv Credit Pass can play a crucial role in helping you build and maintain a positive credit score. Its real-time credit health dashboard allows you to track all your credit accounts from one place and monitor the factors that affect them. Use the monthly CIBIL Score checks and the interactive tools to plan your credit journey proactively and strengthen your creditworthiness.
Remember, your credit score is not set in stone; it is dynamic and can change based on your financial habits. By understanding the factors that influence your credit score, you can take control of your financial well-being and make informed decisions for a brighter financial future.
