5 key factors that determine your credit score in India

When deciding how creditworthy you are, lenders typically start by checking your credit score, especially when considering a credit card or personal loan application.

Your credit score is a three-digit number, determined by your past credit behaviour, that indicates your financial reliability. You would benefit from regularly checking your credit score so that you stay informed and take action if necessary.

To help you understand the factors that affect your credit score and what you need to do to maintain your credit profile, we have outlined the five major factors that affect your credit score in this post.

Still, before proceeding, let's first examine the 5 C's of credit score to gain a better understanding of the concept. Lending institutions often assess the creditworthiness of aspiring borrowers using the 5 C’s of credit.

These factors help evaluate repayment ability, financial discipline, and overall risk before approving loans or credit cards. They are discussed briefly below:

Understanding the 5 C’s of credit score evaluation

• Character: Reflects the borrower's repayment history and credit discipline, showing how reliably you have handled past credit. Repayment integrity, hence, is fundamental here, just like it is in all other things of life.
• Capacity: Measures the borrower's ability to repay based on income, employment stability, and existing financial commitments. Capacity, hence, is a clear definition of one's ability to meet repayments without looking for more debt.
• Capital: Capital is an indicator of one's financial strength through savings, investments, and personal assets. Personal assets here can include gold, silver, or any other valuable product that can be pledged as collateral to meet debt obligations.
• Collateral: Refers to assets pledged to secure a loan, reducing risk for the lender. A collateral helps in making the process of loan clearance smoother and easier. The onus of repayment now lies with the borrower, and the risk to the lender is significantly reduced.
• Conditions: Considers the purpose of the loan and broader economic or financial conditions affecting repayment. These are the regulations and conditions that define how the entire loan will be repaid, and in the event of any dispute, how it will be resolved.

Therefore, keeping the above factors in mind, let us now examine the five key factors that influence an individual's credit score.

5 essential factors that influence your credit score

I. Whether you pay your credit card bill on time: One of the key factors which plays a role in determining your credit score is whether you pay your credit card bill on time. For instance, if you delay or default on your credit card bill payment, your credit score will suffer.

II. Portion of bill cleared: Whether you pay the full credit card bill or only the minimum due: Another factor that determines your credit score is whether you make the full payment of your card, or you pay the minimum due. For instance, if you make the full payment, it reflects positively and therefore, your score stands to improve. On the other hand, when you only pay the minimum due, it will reflect negatively on your credit report.

III. Credit utilisation ratio: This is the ratio of the credit you have utilised out of the total credit limit available. The larger this ratio, the poorer the score gets. For instance, if you have utilised 80 per cent of your total credit limit, it indicates a poor credit record. On the other hand, if you have utilised only 20 per cent, it means your credit record is good. The ideal ratio is believed to be under 30 per cent.

IV. Whether there is a credit history: Another factor that plays a role in your credit score is whether you have a credit history or not. There are some young salaried persons who do not have a credit history. This means the credit score – without any fault of the applicant(s) – is not high.

V. Whether there is a good credit mix: Finally, it is important to have a healthy credit mix, which entails a blend of credit options such as credit cards, loans and secured loans.

When there is a good credit mix, the credit score tends to improve. Conversely, when the credit mix is not healthy, the credit score suffers.

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.