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However, not all these factors affect your credit score equally.
Your repayment history, for instance, matters much more than the number of hard enquiries on your credit report. A hard inquiry, also known as a hard pull or hard credit check, is when a lender or financial institution reviews your credit report to assess your creditworthiness. These usually occur when you apply for a new credit card, loan, or other form of credit.
Here’s a rundown of the most important factors that affect your credit score and what you can do to improve it.
Repayment history: This is one of the main factors that affect your credit score, and it’s pretty straightforward. The more often you pay on time, the better your credit score. Even a single late payment can damage your score. If you have several credit cards or loans, it’s a good idea to set up auto-payments.
Having more credit cards can help boost your credit score because of this factor. For example, if you have 20 credit cards, 20 on-time payments will be recorded on your credit report every month, even if you don’t use all of them. Just make sure there are no late payments.
Also read: How a single late payment can decimate your credit score
Credit utilisation ratio (CUR): This is the proportion of your total credit limit that you actually use. Consider this the second-most important factor for your credit score.
The lower your CUR, the better. You should ideally keep it under 30%. To maintain a low CUR, you can apply for more credit cards or request credit-limit increases on your existing cards. This will increase your total available credit and in turn lower your CUR, assuming your spending doesn’t increase.
Credit account age: This is the length of time you’ve had credit accounts and is another important factor for your credit score. Older credit accounts have a positive impact on your credit report, so it’s good to keep your oldest credit accounts active. Try to get a credit card with zero or low annual fees early on, and don’t close it unless there’s a real issue. However, you don’t need to worry too much about this factor as your credit account age will increase over time and automatically improve your credit score.
Also read: Why banks flag business expenses paid on personal credit cards
Credit mix: Having a mix of credit products can be good for your credit score. Credit products can be secured (home loans, credit cards against fixed deposits) or unsecured (regular credit cards). However, this is not a significant factor, so if you don’t need a car or home loan, don’t get one just to improve your credit score.
Hard enquiries: When you apply for a credit product, the issuer performs a hard inquiry on your credit report. Soft enquiries (when you check your credit score yourself) don’t affect your credit score, but multiple hard inquiries in a short period can reduce it.
However, if you have a long credit history, a low CUR, and a long history of on-time payments, this factor will have little impact. Nonetheless, it’s best not to apply for more than three credit products over a six-month period.
Advanced strategies
For most people, focusing on the basics – paying on time, managing your credit utilisation, and monitoring your credit report – is more than enough to maintain a good score. These advanced tips can give you an extra edge, but aren’t necessary for everyone.
Get more lifetime-free credit cards: As mentioned earlier, the more credit cards you have, the more on-time payments you will record each month. However, some credit card issuers may not generate a statement if you don’t use the card within the statement period. To overcome this, you can simply make a small payment, say ₹10, on each card you don’t actively use. When you have a credit balance on your card, the bank is required to generate a statement.
Also read | Mint Primer: Why are banks issuing fewer credit cards?
Keep outstanding balances at 0: Banks report customers’ credit card usage data to credit bureaus on specific dates, which could be the end of the month or your billing date. You can find this date in your CIBIL report. Try to maintain a zero or very low outstanding balance on each credit card on the reporting date. This will lower your CUR and improve your credit score.
Sumanta Mandal is the founder of TechnoFino.
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