Your credit score is extremely vital to ease your financial functioning. With a good credit
score, you can secure loans, grab credit cards and even rent a property without much hassle
But if your credit score is low, you might face challenges to accomplish these tasks.
Moreover, you might have to shell out more money as interest rates for low-credit score
individuals is often high.

Factors affect your credit score

In this blog, we will share some important factors affect your credit score. So, make
sure you do everything in your power to maintain your credit score. If you find it difficult,
you can always consult professionals like Nanak Accountants & Associates for help. But first, let’s
understand these factors affect your credit score.

Payment History

Your payment history is the most critical factors affect your credit score. In fact, it
accounts for almost 35% of your credit score. When you have a good payment history, it’s
generally believed that you have a good ability to repay your debts. So, the best thing you can
do to keep your credit score high is to keep making payments on time.

If you fail to pay your EMIs on time, you go default or bankrupt; your credit score will go
down the drain. The worst part? A bad credit score can stay up to 5 years on your credit
report. So make sure you pay off your debts on time.

Credit Utilisation Ratio

Another major factor that contributes to your credit score is your Credit Utilisation Ratio.
This is the ratio of how much credit you are eligible for and how much of it you are using. It
accounts for almost 30% of your credit score.

The best thing you can do to keep your credit utilisation score at a bare minimum is to use
credit only when necessary. This indicates that you are not overly reliant on your credits. So
the next time you think of going on a shopping spree using your credit card, think twice! It
can bring down your credit score significantly.

Length of Credit History

The longer you are in the banking system, the better your credit score you might have.
Reason? Well, it’s the length of your credit history that accounts for 15% of your credit score.
This is measured as the number of years, months or days since you had your first account and
the time when your credit score is being calculated.

As you have a longer credit history, institutions have more data to analyse your spending
behaviour. That’s why we recommend that our clients keep their older accounts open, even if
they are not using them. Such accounts can help lengthen your Credit History and boost your
Credit Score.

Credit Mix

Credit mix refers to the variety of credit accounts you have. This includes credit cards,
personal loans, and mortgages. This factor accounts for about 10% of your credit score. So,
how can you use it to improve your credit score? Well, it’s pretty simple. Make sure you have
a diverse credit profile.

A diverse credit portfolio indicates to lenders that you can manage different types of credit
responsibly. Remember, it’s good to have a mix of credit types. But what’s more important is
the need for efficiency to manage all these credit types! If you fail to repay even a single EMI
on any one of them, your score can be drastically impacted.

New Credit Applications

New credit applications influence about 10% of your credit score. Each time you apply for
credit, a hard inquiry is recorded on your credit report. Multiple inquiries in a short period
can negatively affect your score. Reason? The frequent credit check request indicates you
often need credit.

This means you are not good at managing your finances! So, make sure to limit new credit
applications and only apply for credit when necessary. If you need to shop around for rates,
do so within a short timeframe to minimise the impact on your credit score.

Derogatory Marks

Derogatory marks, too, factors affect your credit score. For example, bankruptcies, foreclosures,
and tax liens can have a significant negative impact on your credit score. These marks
indicate severe financial distress and can remain on your credit report for many years.

Managing your finances responsibly to avoid these situations is crucial. If you get derogatory
marks, it can severely factors affect your credit scores. And once your credit score is damaged, it
will take a lot of time to repair.

Frequency and Volume of Credit Enquiries

The frequency and volume of credit enquiries can also factors affect your credit score. Credit
enquiries include both soft enquiries (checks by you or existing creditors) and hard enquiries
(checks by potential lenders). While soft enquiries do not affect your score, hard enquiries do.
Frequent hard enquiries can lower your score, as they suggest to lenders that you may be
taking on more debt than you can handle. So, do everything in your power to check the
number of hard inquiries to ensure your credit score is not impacted.

Comprehensive Credit Reporting (CCR)

Australia has adopted Comprehensive Credit Reporting (CCR). This means both positive and
negative credit behaviours are included in credit reports. This change provides a more
balanced view of your creditworthiness. Regular, on-time payments and low credit balances
contribute positively under CCR. Similalry, if you have missed payments and have high
credit utilisation rates, it can negatively impact your score.

Wrapping Up

We hope now you have a got a pretty clear idea about the crucial factors affect your
credit score. A good credit score can act as a life raft for you whenever you are in trouble.
But that does not mean you utilise credit on the whim. So its necessary to know when to take
credit and when to avoid.

If you feel confused about making such decisions, it’s always better to consult professionals
like Nanak Accountants & Associates. Such professionals can help you make the right decisions even in a
distressing time. Result? Your credit score stays healthy, and you never feel the financial
crunch. For any more information or assistance on the matter, feel free to reach out. Our
experts are here to help.