Top Factors Affecting Credit Score Every Consumer Should Know

A credit score isn't just a number; it's an important factor that influences your loan approval, interest rates, etc. Understanding what affects your credit score empowers you to take control and make smarter financial choices. With this blog, let's break down how a CIBIL score is calculated and the important factors that affect your credit score. 

How is CIBIL Score Calculated?

The credit score is calculated based on the four major factors, which are payment history, credit exposure, credit type and duration, and other factors. Here are the factors and their breakdown in percentage: 

Percentage	Factors
30%	Payment History
25%	Credit Exposure
25%	Credit Type and duration
20%	Other factors

 

Top 8 Factors That Affect Your Credit Score Negatively

Here are the top 8 factors related to your credit report and accounts that affect your credit score:

1. Negligent Payment Behaviour

Your payment history plays a key role in shaping your CIBIL score - making up 30% of it. Missing EMIs can seriously damage your score and signal poor financial discipline to lenders. To stay on track, it’s wise to set up payment reminders or automate your payments. Consistently paying on time helps build a strong credit profile and keeps your score healthy.

2. Exceeding the Credit limit 

As a borrower, you should follow the basic credit utilisation ratio, which is 30% of the credit limit. By exceeding the credit limit, you might alert lenders as a high-risk borrower. 

For example, if your credit limit is Rs. 2 Lakh, you should aim to spend around Rs. 60,000 and not more than that. Utilising more than the credit limit might negatively impact your credit score. 

Also Read:- What are the Steps To Login On CIBIL Portal?

3. Unpaid Dues

A credit report is a snapshot of your entire credit history. It includes your repayment records, outstanding balances, overdue payments, and any defaults. Even small unpaid dues on loans or credit cards can hurt your CIBIL score. That’s why it’s important to clear all outstanding amounts promptly. Keeping your accounts in good standing shows financial responsibility and helps maintain a healthy credit score

4. Paying only the Minimum Amount Due

Paying only the minimum due on your credit card can hurt your credit score. It increases your debt through compounding interest and raises your credit utilisation, making you look risky to lenders. Over time, this can lead to a debt trap and strain your monthly budget.

5. Making Multiple Credit Applications

Whenever you apply for a new credit or loan, a hard inquiry is made by lenders. Multiple applications reflect on your CIBIL report or credit report. These multiple hard inquiries negatively affect your CIBIL score. As a borrower, you should never apply for multiple financing options within a short time. If your credit card application is rejected, you should first take measures to improve your CIBIL score. 

6. Errors in your CIBIL Report

A CIBIL report provides a comprehensive overview of your credit history, including all your past and current credit accounts. If you spot any errors in the report, it’s important to act quickly by raising a dispute with the relevant credit bureau. Mistakes in your report, such as incorrect account details or payment records, can negatively impact your CIBIL score and affect your ability to get loans or credit in the future

7. Not Having a Credit Mix

There are two types of credit: secured and unsecured loans. As a borrower, having a healthy mix of both, known as your credit mix, can work in your favour. A diverse credit profile shows lenders that you’re capable of managing different types of financial responsibilities. Whether it’s an unsecured loan like a personal loan or a secured one like an education loan, your ability to handle both signals that you're a reliable and experienced borrower.

8. Credit History

The more time you’ve spent using credit, the better you usually get at managing it. That’s why a longer credit history can help raise your credit score. The credit score looks at how old your oldest and newest credit accounts are, and the average age of all your accounts.

Tips to Improve your Credit Score Positively

Here are some effective tips to improve your credit score: 

Make Timely Payments

Your payment history is the most important factor in your credit score. Always pay your credit card bills, EMIs, and loan dues on time. Set up automatic payments or reminders to avoid missed or late payments.. 

Maintain Low Credit Utilization 

Use less than 30% of your available credit limit. High credit usage signals financial stress to lenders. Keeping it low shows responsible credit behaviour and can improve your score.

Limit New Credit Application

Every time you apply for a new credit, a hard inquiry is made, which temporarily lowers your credit score. Apply for credit only when necessary and avoid multiple loan applications in a short period. 

Regularly Check for Errors

Check your credit report regularly for mistakes and unauthorised activity. Raise a dispute if you notice any errors, as they can reduce your credit score. 

Clear Outstanding Debt

Reducing the existing debt can improve your debt-to-income ratio and will be viewed favourably by the lenders. Aim to pay off loans and credit card balances whenever possible.  

Maintain Older Credit Accounts

The length of credit history matters. Keep your old credit card accounts or any other older accounts open, as it displays long-term responsible credit behaviour. 

Diversify Your Credit Mix

Having different types of credits can leave a positive impact on your credit score. It shows you can manage different types of debt. But only apply for a credit when necessary and when you can responsibly manage it. 

To Conclude

Irrespective of your CIBIL score, it is important that you have good financial habits from an early stage of life. These habits lay a foundation for a good financial portfolio. It might take a few months or even years to change your negative CIBIL score. While you focus on improving your CIBIL score, you should also consider planning your credit with financial institutions from time to time.

Frequently Asked Questions

What is a credit score, and why is it important?

A credit score is a numerical representation of your creditworthiness. It helps lenders assess your ability to repay loans, which is crucial for their lending decision,  and influences loan approvals, interest rates, and credit limits.

How does a CIBIL score impact loan approvals?

A higher CIBIL score increases your chances of loan approval and helps you secure better interest rates. A lower score may lead to rejection or higher interest charges.

What happens if I exceed my credit limit?

Exceeding your allotted limit increases your credit utilization ratio, which can lower your score and mark you as a risky borrower.

What are the best ways to improve my credit score?

Pay bills on time, maintain low credit utilisation, have a good credit mix with different credit products, avoid multiple applications and hard inquiries, and regularly check your credit report.

How long does it take to improve a poor credit score?

It can take several months to a few years, depending on your financial habits and consistency.

What financial habits support a healthy credit score?

Timely payments, low credit usage, regular monitoring, and responsible borrowing are key habits for a strong score.