How to boost your credit score and secure better loans
What's the story
Credit scores can appear complicated, but are essential for your financial well-being. These scores dictate your creditworthiness and influence your chances of getting a loan or new credit card. Understanding the mechanics can help you stay on top of your finances. In this story, we simplify the components of credit scores and the tips to improve them. So, you can navigate the credit space confidently.
Score breakdown
Components of a credit score
Usually, a credit score is made up of five key factors: payment history (35%), amounts owed (30%), length of credit history (15%), new inquiries (10%), and types of credit (10%). Payment history is the most important factor, followed by amounts owed, length of credit history, new inquiries, and types of credit. Knowing these factors helps you understand what affects your score.
Timely payments
Importance of payment history
Payment history is everything, as it shows how reliably you return borrowed money. Late payments can dent your score considerably. Paying bills on time, consistently, indicates lenders that you are responsible when it comes to managing debt. You can set up automatic payments or reminders to ensure timely payments and, in turn, a healthy payment history.
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Managing debt levels
The amount you owe relative to your available limit impacts your CIBIL score via the utilization ratio. Keeping it under 30% is ideal to ensure a good score. Paying down existing debt and not maxing out cards helps you keep your debt levels in check.
Credit age
Length of credit history matters
The age of your oldest account and the average age across all accounts play a role in this factor. The longer your history, the more stable and reliable you look to lenders when it comes to managing finances over time. Don't close old accounts unnecessarily, they'll only add positively to the length aspect of your score.
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Impact of new credit inquiries
Every time you apply for a new credit, an inquiry shows up on your report, which may reduce your score slightly, albeit temporarily. However, several inquiries in a short span can have a greater impact, as it could indicate financial distress or over-reliance on borrowing.